Secured Transactions – Personal Property



Secured Transactions – Personal Property

Scope of UCC Article 9

History

• Before adoption of the UCC there were non-uniform laws

• Non-uniform law was unclear how a creditor should put other creditors on notice of their interest

o Benedict v. Ratner

▪ Carpet company arranged a loan using the accounts receivable as collateral. Law was unclear how a secured creditor should perfect an interest in accounts receivable. Arrangement allowed debtor to collect the accounts until the secured creditor asked for payment. The bankruptcy trustee claimed the transfers were fraudulent—a secret lien problem. If no one knew the loan was secured by the accounts receivable, another creditor might extend credit also using the accounts as collateral. Court determined under NY law leaving the debtor with unfettered use of the proceeds is misleading to other parties and fraudulent—whether the interest is recorded or not.

▪ Note: The rule in this case did not survive Article 9 which has a recording mechanism. The case was in 1925 and recording was not enough because the recording system was not so good. Shows the uncertainty of the law at that time which resulted in more difficulty for companies to get credit.

Generally

• If a seller wants to retain the right to reclaim goods, they must take an Art. 9 security interest in the goods and record the interest in the proper place

o Exception: Under Art. 2 if a buyer pays for goods with a bad check, the seller has a right to reclaim within a reasonable time.

• Article 1 of the UCC provides general provisions that govern all of the code

o 1-103

▪ Purpose of the code is to make for uniform and certain laws

▪ Unless displaced by the code, general principals of law and equity supplement the code

• Ex: fraud, estoppel, misrepresentation, duress, coercion, mistake

o 1-202 – 1-205

▪ This section provides general definitions. If a term is not defined in Art. 9, then look to Art. 1.

o 1-304

▪ There is an obligation under the UCC to act in good faith in the performance and enforcement of Ks

• Good faith means honesty in fact and the observance of reasonable commercial standards – 1-201(b)(20)

• A security interest is an interest in personal property or fixtures which secures payment or performance of an obligation – 1-201(35)

• 9-109 is the basic scope provision of Art. 9

o The article applies to (unless otherwise provided)

▪ A transaction, regardless of its form, that creates a security interest in personal property or fixtures by K

• A consensual lien

▪ An agricultural lien

▪ A sale of accounts, chattel paper, payment intangibles, or promissory notes

• Note: while think of Art. 9 as normally covering lending, in this instance it covers sales (unless excluded by 9-109(d))

• Ex: with accounts, a lender would not know a party has sold the accounts unless there is a record of the sale

▪ A consignment

▪ Security interests arising under specified sections of the code

o Art. 9 applies to security interests even when the obligation is secured by a transaction or interest to which Art. 9 does not apply

o Art. 9 does not apply when certain statutes, regulations, or treaties preempt the article (see Exclusions below)

o Art. 9 also contains a list of exclusions (see Exclusions below)

Consignments

• There are three types of consignments

o 1) consignments that fall into the definition of consignment defined in 9-102(20)

▪ Consignments must comply with Art. 9 – 9-109(a)(4)

▪ A transaction in which a person delivers goods to a merchant for the purpose of sale and:

• The merchant

o Deals in goods of that kind under a name that is different from the name of the person making delivery

o Is not an auctioneer

o Is not generally known by creditors to be substantially engaged in selling the goods of others

• For each delivery the aggregate value of the goods is $1000 or more

• The goods are not consumer goods immediately before delivery

• Transaction does not create a security interest that secures an obligation

o Note: this means if the transaction did create a security it would not be a consignment—but it would still be subject to Art. 9 because a security interest was created

o 2) collateralized transactions that are disguised as consignments

▪ The transactions must still comply with Art. 9

o 3) consignments excluded from Art. 9 by 9-201(20)

▪ The transactions do not have to comply with Art. 9

▪ Ex: creditors know that the consignee is generally is the business of selling the goods of others

• Problems with consignments

o There is a secret lien problem with consignments

▪ Ex: Greg. S. wants to sell USC wind up dolls. The retailer does not want to buy them but says he can put them on the shelf and get the proceeds (minus a percentage) and Greg can take back what does not sell. Retailer provides the space but does not take a risk with the products. The problem is when the world sees the transaction they cannot tell who owns the wind-up dolls—looks to the world that the retailer owns them.

• Difference between a consignment and a sale

o Sale

▪ Consignee takes the risk, pockets the proceeds, owns the merchandise

o Consignment

▪ Consignor takes the risk, items that do not sell are returned

o In re Fabers, Inc.

▪ A consignment of rugs and consignee goes bankrupt. Court says that while parties called it an assignment, it was really a sale with the seller retaining a security interest. The buyer was buying rugs on credit and all the risk was on the buyer—this was inconsistent with a consignment. Since it was really a secure transaction they needed to comply with Art. 9.

Leases

• Whether a transaction is a lease or security interest is distinguished in 1-203

o Determining whether a sale or a lease is a case by case inquiry

o Even if called a lease, a security interest is created if the lessee must pay throughout the lease term and cannot terminate the lease and

▪ The original length of the lease is equal to or greater than the remaining economic life of the goods

▪ The lessee has to renew the lease for the remaining economic life of the goods or become the owner

▪ Lessee has an option to renew the lease for the remaining economic life of the good for no additional consideration or for nominal consideration

▪ Lessee has an option to become the owner of the goods for no additional consideration or for nominal consideration

• Nominal: Comments say to look at the difference between the money being paid and what expect the item to be worth at the end of the day; commentators have said that if the option to purchase is 50% less than predicted FMV, it might really be a sale

• In re Architectural Millwork of Virginia, Inc.

o Finance lease for sale of a forklift. The K allowed the debtor to buy the forklift for a $1 after all payments made. This is a disguised sale and since the lessor did not file, they have an unperfected security interest and lose to the bankruptcy trustee.

o There was also a finance lease for a truck. The debtor could buy the truck for 9K and own the truck, or truck would be sold and debtor makes up the difference between the 9K and sale price or gets credit for sale over 9K. Court determines this is an option with value, the 9K seemed to be what the parties though the fair price would be.

o A lease is not considered a security interest just because

▪ The present value of the consideration the lessee has to pay for the lease is greater than or equal to the FMV

▪ The lessee assumes the risk of loss

▪ The lessee agrees to pay taxes, insurance, filing, recording or registration fees, or service and maintenance costs

▪ Lessee has an option to renew the lease for a price that is equal or greater than the FMV of the goods for the period of renewal

▪ Lessee has an option to become the owner by paying an amount equal to or greater than the FMV at the time the option is to be performed

• Problems with leases

o Secret lien problem

▪ Ex: you lease equipment, it is in your shop and people think you own it unless there is documentation that you do not

o People might try to call a sale a lease for tax and accounting reasons

• Simple method to determine whether a transaction is a sale or a lease

o Sale

▪ The parties contemplate title passing to the buyer; there is no reversionary interest for the seller

• Must file a financing statement if a security interest attaches to the sale

o Lease

▪ The parties contemplate a reversionary interest for the lessor

• If a true lease then do not have to file a financing statement

o Historically lessors have not been required to file

o Does it appear that the intent of the parties is the lessee will end up owning the item at the end of the day?

▪ Will anything of value be returned to the seller?

Equitable Subrogation

• Article 9 does not directly address the issue of subrogation, but remember that 1-103 states that general principles of law and equity supplement the UCC

o Ex: insurance company steps into the shoes of a person that was wronged and tries to recover from the party that owes money

▪ Art. 9 does not directly address the issue, but the right claimed is an equitable right outside of Art. 9 and courts generally find that the equitable right trumps the Art. 9 right

Exclusions

• Art. 9 does not apply when certain statutes, treaties or regulations preempt the Art.

o 9-109(c): Art. 9 will not apply to the extent that

▪ The article is preempted by a statute, regulation or treaty of the US

• Most of the federal laws that preempt are recording acts

o Ex: Rather than record in the secretary of state’s office, have to record in a federal office such as the FAA or the patent office.

• Philko Aviation, Inc. v. Shacket

o Person sells airplane twice. Buyer 2 wins because federal law requires a security interest in an airplane to be filed with the FAA. Buyer 1 did not do this, so as long as buyer 2 did not have notice of the prior sale, they win.

▪ Another statute of the state expressly governs the creation, perfection, priority or enforcement of a security interest created by the state or a governmental unit of the state

▪ A statute of another state or country, other than a statute generally applicable to security interests, expressly governs creation, perfection, priority, or enforcement of a security interest created by the state or country

▪ The rights of a transferee beneficiary or nominated person under a letter of credit are independent and superior under 5-114

• There are specific exemptions to Art. 9 where a security interest is not created

o 9-109(d): This article does not apply to

▪ A landlord’s lien, other than an agricultural lien

• Comments suggest that what drafters are excluding are landlord liens that are in nature not consensual—those that arise through operation of law (statue, court decision)

• Might also include landlord liens that are a nonconsensual lien on fixtues

▪ A lien, other than an agricultural lien given by statute of other rule of law for service or materials

• Ex: artisan’s lien created by a state statute

▪ As assignment of a claim for wages, salary or other compensation of employee

• Note: an employee cannot use wages as collateral under Art.9, but if the person is an individual contractor rather than an employee, an assignment of the right to be paid might trigger Art. 9

▪ A sale of accounts, chattel paper, payment intangibles, or promissory notes as part of a sale of the business out of which they arose

• Ex: If accounts are sold with the business, Art. 9 does not apply to the transaction.

▪ An assignment of accounts, chattel paper, payment intangibles, or promissory notes which is for the purpose of collection only

▪ An assignment of a right to payment under a K to an assignee that is also obligated to perform under the K

• Ex: Artist transfer a job (and the right to be paid for it) to another artist.

▪ Assignment of a single account, payment intangible, or promissory note to an assignee in full or partial satisfaction of a pre-existing indebtedness

▪ Transfer of an interest in or an assignment of a claim under a policy of insurance, other than an assignment by or to a health-care provider of a health-car-insurance receivable and any subsequent assignment of the right to payment

▪ Assignment of a right represented by a judgment, other than a judgment taken on a right to payment that was collateral

▪ A right to recoupment of set-off, but

• 9-340 applies with recoupment or set-ff against deposit accounts

• 9-404 applies for defenses or claims of an account debtor

▪ The creation or transfer of an interest in or lien on real property, including a lease or rents thereunder, except to the extent that provision is made for

• Liens on real property

• Fixtures

• Fixture filings

• Security agreements covering personal and real property

▪ An assignment of a claim arising in tort, other than a commercial tort claim

▪ Assignment of a deposit account in a consumer transaction

• Article 9 does not apply to real property transactions

o A mortgage on a house or the assignment to a right to lease are not covered

o Remember that a real property transaction can create personal property that would be subject to Art. 9

▪ Ex: When the local loan company extends credit, they are taking promissory notes from the borrowers. The notes are instruments, written promises to pay money. The notes may be secured by personal property, but the notes are personal property—and when they notes are used as collateral the transaction is subject to Art. 9.

Classification of the Collateral: 9-102

Goods

• Consumer Goods – 9-102(a)(23)

o Goods that are used or bought for use primarily for personal, family, or household purposes

▪ Ex: A piano used in a home

• Equipment – 9-102(a)(33)

o Goods other than inventory, farm products, or consumer goods

▪ Ex: Farmer’s tractor (not in the definition of farm products)

▪ Morgan County Feeders, Inc. v. McCormick

• Longhorn cattle being used in recreational cattle drives. If they are inventory then buyer can defeat the secured party. If they are equipment then the secured party wins. Court finds that the cattle are not really held for sale—and for inventory they must be held for sale or lease. So even though debtor sells some of them, they are primarily used for cattle drives and classified as equipment.

o This is the catch-all for goods

o Generally durable assets that will have a useful life of more than a few months

• Farm Products – 9-102(a)(34)

o Farm products means goods, other than standing timber, with respect to which the debtor is engaged in a farming operation and which are:

▪ Crops, grown, growing, or to be grown including: crops produced on trees, vines and bushes; and aquatic goods produced in aquacultural operations.

▪ Livestock, born or unborn, including aquatic goods

• Ex: cattle, chickens

▪ Supplies used or produced in a farming operation

▪ Products of crops or livestock in their unmanufactured state

• Ex: manure

• Inventory – 9-102(a)(48)

o Goods, other than farm products, which

▪ Are leased by a person as lessor

▪ Are held by a person for sale or lease or to be furnished under a K or service

▪ Are furnished by a person under a K of service

▪ Consist of raw materials, work in process, or materials used or consumed in a business

o “Stuff that is used up in the business”

▪ Items that have a short economic life

▪ Ex: supplies and materials consumed in the business—pencils, stationary

Quasi-Tangible Property: Pieces of paper used as collateral

• Instruments – 9-102(a)(47)

o A negotiable instrument or any other writing that evidences a right to the payment of a monetary obligation, is not itself a security agreement or lease, and is of a type that in ordinary course of business is transferred by delivery with any necessary indorsement or assignment.

o Does not include investment property; letters of credit; writings that evidence a right to payment arising out of the use of a credit card

o Ex:

▪ Promissory notes, checks

• Investment Property (stocks, bonds) – 9-102(a)(49)

o A security , whether certificated or uncertificated, security entitlement, securities account, commodity contract, or commodity account

• Documents (warehouse receipts, bills of lading) – 9-102(a)(30)

o A document of title or a receipt of the type described in 7-201(b)

• Chattel Paper – 9-102(a)(11)

o A record or records that evidence both a monetary obligation and a security interest in specific goods, a lease of specific goods (and software or license of software used in the goods)

▪ Monetary obligation means a monetary obligation secured by the goods or owed under a lease of the goods (includes software)

▪ Does not include charters or other Ks involving the use of a hired vessel; records that evidence a right to payment arising out of the use of a credit card

▪ If a transaction is evidenced by records that include an instrument or series of instruments, the group of records taken together constitutes chattel paper

o A paper that demonstrates both an obligation to pay money and also represents an ownership interest in the goods.

▪ Ex:

• Lease—lessor retains the interest in ownership in the goods and the lessee is obligated to pay for the lease

• Sale—sale of goods where buyer has the goods and the seller can reclaim the goods if not paid

▪ Chattel paper indicates two things

• An obligation to pay money

• Reserves a property interest in the seller

▪ Contrast to promissory note where there is a promise to pay and nothing else—no interest retained

▪ Contrast to an account receivable which is a promise to pay not evidences by a promissory note or chattel paper

o Note that 9-105 provides a mechanism for electronic chattel paper

▪ The secured party can take control over electronic chattel paper

• Letters of Credit Rights – 9-102(a)(51)

o A right to payment or performance under a letter of credit, whether or not the beneficiary has demanded or is at the time entitled to demand payment or performance. Does not include right of a beneficiary to demand payment or performance under a letter of credit.

Intangible Property: Property having no significant physical form

• Accounts – 9-102(a)(2)

o A right to payment of a monetary obligation, whether or not earned by performance,

▪ For property that has been or is to be sold, leased, licensed, assigned or otherwise disposed of

▪ For services rendered or to be rendered

▪ For a policy of insurance issued or to be issued

▪ For energy provided or to be provided

▪ For the use or hire of a vessel under a charter or other K

▪ Arising out of the use of a credit or charge card or information contained on or for use with the card

▪ As winnings in a lottery or other game of chance

o The term does not include

▪ Rights to payment as evidenced by chattel paper or an instrument

▪ Commercial tort claims

▪ Deposit accounts

▪ Investment property

▪ Letter of credit rights or letters of credit

▪ Rights to payment for money or funds advanced or sold, other than rights arising out of the use of a credit or charge car or information contained on or for use with the card

o Health-Care-Insurance Receivables - (subcategory of account) 9-102(a)(46)

▪ An interest in or claim under a policy of insurance which is a right to payment of a monetary obligation for health-care goods or services provided or to be provided

• Deposit Accounts – 9-102(a)(29)

o A demand, time, savings, passbook, or similar account maintained with a bank. Does not include investment property or accounts evidenced by an instrument.

• General Intangibles – 9-102(a)(42)

o Any personal property, including things in action, other than accounts, chattel paper, commercial tort claims, deposit accounts, documents, goods, instruments, investment property, letter of credit rights, letters of credit, money, and oil, gas or other minerals before extraction. Includes payment intangibles and software.

▪ Payment Intangible – (subset of general intangible) 9-102(a)(61)

• A general intangible under which the account debtor’s principal obligation is a monetary obligation.

• Ex: oral loan agreement

o This is the catchall for intangible property rights

▪ Note: If it is not an account and it is not excluded from the definition of general intangible, it is a general intangible

o A settlement agreement may be a general intangible.

▪ Art. 9 does not apply to rights represented by judgments, other than a judgment taken on a right to payment that was collateral (9-109(d)(9))

▪ Art. 9 does not apply to personal injury claims—but it does apply to commercial tort claims

▪ But once a claim arising in tort has been settled and reduced to a claim to a right to pay—it becomes a payment intangible and ceased being a claim in tort

▪ Ex: Hull punches Will in the face, Will sues in tort

• The claim is not subject to Art. 9

• If Will gets a judgment it is not subject to Art. 9

• If the parties agree to a settlement, there is a payment and that is covered by Art. 9

What if the debtor changes the use of the collateral?

• If characterize the collateral and then change the use, 9-507(b) states that the financing statement will not be ineffective if the original filing statement becomes seriously misleading

o Ex: Debtor says the item will be equipment and then uses it as consumer goods. If described as equipment in the financing statement and then later there is a change in use, the original financing statement will not be rendered ineffective.

o In re Morton

▪ Guy bought a station wagon for family use and then started using it for business purposes. Bank in this case filed as though it was a consumer good. Court said to look at the intent of the debtor when security interest attached. Now it is not really a problem because the security interest in a car is indicated by registering with the DMV—so it does not matter whether it is consumer goods or equipment.

▪ Author notes in may be a problem to allow the secured party to rely on the debtor’s stated intent. You file and the world is on notice that the item is equipment, then the debtor converts it to consumer goods and another creditor then sees the lien on equipment, but not the lien on consumer goods. So there is a secret lien problem.

• Conflict between a secret lien and allowing a creditor to rely on how the debtor says they will use the item—courts go both ways.

Purchase Money Security Interest

The PMSI - 9103

• When a seller is financing the purchase of goods, that is a PMSI

o Definitions

▪ “purchase money collateral” is goods or software that secure a purchase money obligation incurred with respect to that collateral

▪ “purchase money obligation” is an obligation of an obligor incurred as all or part of the price of the collateral or for value given to enable the debtor to acquire rights in or the use of the collateral if the value is in fact so used

o Purchase money security interest in goods—it is a PMSI

▪ To the extent that the goods are purchase money collateral with respect to that security interest

▪ If the security interest is in inventory that is or was purchase money collateral, also the extent that the security interest secures a purchase money obligation incurred with respect to other inventory in which the secured party holds or held a purchase money secured interest

▪ Also to the extent that the security interest secures a purchase money obligation incurred with respect to software in which the secured party holds or held a purchase money security interest

o Purchase money security interest in software

o Consignor’s inventory purchase money security interest

▪ The security interest of a consignor in goods that are the subject to a consignment is a purchase money security interest in inventory

o Application of payment in non consumer goods transactions (explains how to allocate payments when parties have not agreed on something)

▪ In non consumer goods transaction, if the extent to which a security interest is purchase money depends on the application of a payment to a particular obligation, the payment must be applied

• In accordance with any reasonable method of application to which the parties agree

• In the absence of the parties’ agreement to a reasonable method, in accordance with any intention of the obligor manifested at or before the time of payment, or

• In the absence of an agreement to a reasonable method and a timely manifestation, then in the following order

o To obligations that are not secured

o If more than one obligation is secured, to obligations secured by purchase money security interests in which those obligations were incurred

o No loss of status of purchase money security interest in non consumer goods transaction

▪ In a transaction other than a consumer goods transaction, a purchase money security interest does not lose its status as such, even if

• The purchase money collateral also secures an obligation that is not a purchase money obligation

• Collateral that is not purchase money collateral also secures the purchase money obligation

• The purchase money obligation has been renewed, refinanced, consolidated, or restructured.

▪ In re Short (before revised Art. 9)

• Credit extended to debtor to buy furniture, seller gets loan, seller assigns the loan to a finance company. Loan was deferred for year. Then the loan was consolidated—collateral included the PMSI in the furniture and other items. Debtor pays a little on the consolidated loan and defaults.

• Three approaches:

o Dual status—separate the purchase money from the non-purchase money

o Transformation—when refinanced it was reformed and no longer PMSI

o Case by Case—look at facts and see if parties meant to retain PMSI status

• In this case applied first in, first out approach. Payments went to the oldest loan—the furniture

o In other than a consumer goods transaction, the secured party claiming the PMSI has the burden of establishing the extent to which the security interest is a PMSI

o Non consumer goods transactions

▪ The limitations in this section only apply to non-consumer goods transactions. It is intended to leave to the court the determination of the court the proper rules in consumer goods transactions

• So any of the above approaches could apply to consumer goods

• PMSI can be created in the seller of the goods financing the loan themselves, or a third party lender who is extending credit in order to let the debtor buy the collateral

• It is not a PMSI unless the debtor uses the money to purchase the collateral

o Ex: not a PMSI if the loan given to buy a machine and the debtor buys liquor

• The loan must be given to enable the debtor to get the collateral

o If the debtor already has the collateral, it is not a PMSI

o But General Electric Commercial Automotive Finance, Inc. v. Spartan Motors

▪ Secured party 1 had floating lien on debtor’s inventory. Secured party 2 had an arrangement—debtor goes and buys cars and is immediately reimbursed by SP2. Court says SP2 is a purchase money lender and entitled to priority. Was allowed because financing was in place before the cars were purchased, the reimbursement was right after the purchase—technicality here to say not purchase money, and court not going to mess with how the parties structured their transaction.

Technicalities with the Forms

Security Agreement

• A security agreement must be authenticated by the debtor and must describe the collateral

Financing Statement

• A financing statement is the document filed in the appropriate public office by the creditor to perfect the creditor’s rights in the collateral

o Puts the world on notice of the existence of the security interest

Debtor’s Identity

• A financing statement must sufficiently provide the name of the debtor

o 9-503

▪ If the debtor has a name it must be under the individual or organizational name of the debtor; for a debtor that does not have a name it should be under the names of the partners, members, associates

• There are specific rules if the debtor is a registered organization, a decedent’s estate, or a trust or trustee

▪ A financing statement that has the correct name of the debtor will not be invalid because it lacks the debtor’s trade name or the names of the members, partners or associates

▪ A financing statement that only provides the debtor’s trade name is not sufficient

• For a sole proprietorship file under the individual’s name

▪ A financing statement can name more than one debtor, or more than one secured party

• Minors errors will not affect the validity of a financing statement, but it may become valid if the error makes the financing statement seriously misleading

o 9-506

▪ Financing statement substantially satisfying the requirements of this part is effective, even if it has minor errors or omissions, unless the errors or omissions make the financing statement seriously misleading

▪ Except as otherwise provided in (c), a financing statement that fails sufficiently to provide the name of the debtor in accordance with 9-503 is seriously misleading

▪ If a search of the records of the filing office under the debtor’s correct name using the filing office’s standard search logic, if any, would disclose a financing statement that fails sufficiently to provide the name of the debtor in accordance with 9-503, the name provided does not make the financing statement seriously misleading

• Changing names of the debtor may affect the validity of the security interest, but there is a 4 month grace period

o 9-507(c)

▪ If a debtor changes their name so that a financing statement becomes seriously misleading under 9-506 (doing a search will not find it)

• The financing statement is effective to perfect a security interest in collateral acquired by the debtor before, or within 4 months after the change

• The financing statement is not effective to perfect a security interest in collateral acquired by the debtor more than 4 months after the change, unless an amendment to the financing statement which renders the financing statement not seriously misleading is filed with in 4 months after the change

• The merging of two parties(and a name change) might affect the validity of a financing statement

o 9-507(a)

▪ Financing statement will remain effective for collateral that is sold, exchanged, leased, licensed, or otherwise disposed of and in which a security interest or agricultural lien continues, even if the secured party knows of or consents to the disposition

o 9-508

▪ Unless otherwise provided, a filed financing statement naming an original debtor is effective to perfect a security interest in collateral in which a new debtor has or acquires rights to the extent that the financing statement would have been effective had the original debtor acquired rights in the collateral

▪ If the difference between the name of the original debtor and that of the new debtor causes a filed financing statement effective under (a) to become seriously misleading under 9-506

• Financing statement is effective to perfect a security interest in collateral acquired by the new debtor before, and within 4 months after, the new debtor becomes bound under 9-203(d)

• Financing statement is not effective to perfect a security interest in collateral acquired by the new debtor more than 4 months after the new debtor becomes bound under 9-203(d) unless an initial financing statement providing the name of the new debtor is filed before the expiration of that time

• If the secured party, rather than the debtor, changes names, the interest remains perfected without filing a new financing statement

o 9-310(c)

▪ If a secured party assigns a perfected security interest or agricultural lien, a filing under this article is not required to continue the perfected status of the security interest against creditors of and transferees form the original debtor

o Even though it is not required, the new secured party should probably file so that they will be the secured party of record

o Note: The interest will remain perfected if the security interest the new secured party retains is the same interest the old secured party had. However, if the old secured party assigns chattel paper that represents the security interest, the new secured party will still need to file. The original secured interest will remain perfected, but the interest in the chattel paper needs to be recorded to be valid against the old secured party’s creditors.

▪ See Example 2, Comment 4, 9-310

• Debtor vs. Obligor

o Debtor

▪ 9-102(a)(28)(A): person who has interest in collateral that is not the security interest

o Obligor

▪ 9-102(a)(59): Person that with respect to an obligation secured by a security interest or agricultural lien on the collateral

• Owes payment or other performance of the obligation

• Has provided property other than the collateral to secure payment or other performance of the obligation

• Is otherwise accountable in who or in part for payment of other performance of the obligation

o Financing statement should be filed under the name of the debtor—the person that owns the collateral—so that when other creditors are considering a loan, they know that collateral is already securing another loan.

▪ Ex: Robin is getting a loan, but the collateral is Richard’s yacht. Richard is the debtor and Robin is the obligor. The financing statement should have Richard’s name since his yacht is securing the loan.

Description of the Collateral

• There is a distinction between the description of the collateral that is sufficient for the financing statement and that needed for the security agreement

o Security agreement

▪ The description has to be more specific

▪ Supergeneric is not good enough

o Financing statement

▪ Can be more general

▪ Is there to put searchers on inquiry notice, not to give them a complete description of what is encumbered

• Security Agreement

o 9-108

▪ Except as provided in (c), (d) and (e), a description or personal or real property is sufficient if it reasonably identifies what is being described

▪ Except as otherwise provided in (d), a description of the collateral reasonably identifies the collateral if it identifies the collateral by

• Specific listing

• Category

• Except as otherwise provided in (e), a type of collateral defined in the UCC

• Quantity

• Computational or allocational formula or procedure

• Except as in (c), any other method if the identity of the collateral is objectively reasonable

▪ Supergeneric description is not good enough

• Description of collateral as “all the debtor’s assets” or “all the debtor’s personal property or similar does not reasonably identify the collateral

▪ Unless in (e), description of a security entitlement, securities account, or commodity account is sufficient if it describes

• The collateral by those terms or as investment property, or

• The underlying financial asset or commodity K

▪ A description only by type of collateral defined in the ICC is an insufficient description of

• Commercial tort claim

• In a consumer transaction, consumer goods, a security entitlement, a securities account, or a commodity account

• Financing Statement

o 9-504

▪ Financing statement sufficiently indicates the collateral that it covers if the financing statement provides

• A description of the collateral pursuant to 9-108, or

• An indication that the financing statement covers all assets or all personal property

• Issues with after acquired collateral

o Comment 3 to 9-108

▪ Whether a description in a security agreement that does not specifically include after acquired collateral is sufficient to reach that collateral is a question of K interpretation.

• Ex: With inventory—if only says inventory, it is a question of K interpretation to determine whether it means existing inventory only, or whether it includes existing and subsequently acquired. However, most creditors would not take a security interest in only the existing inventory.

• This analysis also applies to accounts.

Creation of the Security Interest – Attachment

Generally

• Three things are needed for a security interest to attach

o Security agreement that describes the collateral and is authenticated by the debtor

▪ Or the secured party must have possession or control of the collateral pursuant to the agreement

o Secured party must give value

o Debtor has rights in the collateral or the power to transfer rights

• The attachment of the security interest is described in 9-203

o A security interest attaches to collateral when it becomes enforceable against the debtor with respect to the collateral, unless an agreement expressly postpones the time of attachment

o Except as otherwise provided, a security interest is enforceable against the debtor and third parties with respect to the collateral only if

▪ Value has been given

▪ The debtor has rights in the collateral or the power to transfer rights in the collateral to a secured party, and

▪ One of the following

• Debtor has authenticated a security agreement that provides a description of the collateral and, if the security interest covers timber to be cut, a description of the land concerned

• The collateral is not a certificated security and is in the possession of the secured party under 9-31 pursuant to the debtor’s security agreement

• The collateral is a certificated security in registered form and the security certificate has been delivered to the secured party under 8-301 pursuant to the debtor’s security agreement

• The collateral is deposit accounts, electronic chattel paper, investment property, letter of credit rights, or electronic documents, and the secured party has control

o A person becomes bound as debtor by a security agreement entered into by another person if, by operation of law other than this article or by K:

▪ The security agreement becomes effective to create a security interest in the person’s property, or

▪ The person becomes generally obligated for the obligations of the other person, including the obligation secured under the security agreement, and acquires or succeeds to all or substantially all of the assets of the other person

o If a new debtor becomes bound as debtor or by a security agreement entered into by another person

▪ The agreement satisfies the requirement to have a security agreement in the existing or after acquired property of the new debtor to the extent that the property is described in the agreement, and

▪ Another agreement is not necessary to make a security interesting the property enforceable

o The attachment of a security interest in collateral gives the secured party the rights to proceeds provided in 9-315 and is also attachment of a security interest in a supporting obligation for the collateral

o The attachment of a security interest in a right to payment or performance secured by a security interest or other lien on personal or real property is also attachment of a security interest in the security interest, mortgage, or other lien

o The attachment of a security interest in a securities account is also attachment of a security interest in the security entitlements carried in the securities account

o The attachment of a security interest in a commodity account is also attachment of a security interest in the commodity contracts carried in the commodity account

The Security Agreement

• Definition of a security agreement – 9-102(a)(73)

o An agreement that creates or provides for a security interest

• Formality of a security agreement

o 9-203(b)(3)(a): Debtor has authenticated a security agreement that provides a basic description of the collateral

▪ Need something that is signed by the debtor that says what the collateral is

o When the collateral is in the possession of the secured party, no written security agreement is required

o Conditional sales K is by its nature a security agreement

▪ The seller of the goods retains title to the goods until the purchase price is paid. When the seller retains the title, they are retaining a security interest in the goods until the price is paid. Sales agreement seems to be a security agreement.

• Description of the Collateral

o 9-108

▪ Description in the security agreement cannot be supergeneric (see above)

• After-Acquired Property

o 9-204 provides that generally a security agreement may create or provide for a security interest in after acquired property, However, a security interest will not attach under an after-acquired property clause to

▪ Consumer goods, other than an accession when given as additional security, unless the debtor acquires rights to them within 10 days after the secured party gives value

• This is to protect consumers—so that they are not subject to having everything seized if they default

▪ Commercial tort claim

o It also provides that a security agreement may provide that collateral secures, or that accounts, chattel paper, payment intangibles or promissory notes are sold in connection with, future advances or other value, whether or not the advances or value are given pursuant to commitment

▪ Comment 5: Security agreement can contemplate using the collateral for later loans as well as the current loan

▪ This facilitates revolving credit situations

o Beware of dragnet clauses

▪ State that collateral debtor is putting up for the loan secures the current loan and all loans in the future

▪ Comment 5 to 9-204

• Parties are free to agree that a security interest covers any obligation whatsoever—it is a matter of construing the parties’ agreement under applicable law

▪ In re Wollin

• Court had to determine whether the cars secured all of the obligations—both the cars and the VISA bills. Court used relatedness analysis of whether the obligations incurred were somehow related to the secured loan. Gets to whether the debtor should reasonably expect other obligations are secured by this collateral. Court thinks that most people do not believe that they are putting up collateral when they incur credit card debt—so credit card debt not like a car loan.

• UCC seems to reject the relatedness analysis in favor of making if a question of construing the K

o But then have to determine what the parties intended—Hull is not sure what extent courts are going to follow this comment

▪ Could also view the K interpretation (objective reasonableness) as whether it would be reasonable for the debtor to believe the collateral was securing all of the obligations

• So the test could still be useful

• Maybe should just not apply the test in a mechanical way

Value

• A secured party must give value before a security interest will attach

• Definition of Value – 1-204

o A person gives value for rights if the person acquires them

▪ In return for a binding commitment to extend credit or for the extension of immediately available credit, whether or not drawn upon and whether or not a charge-back is provided for in the event of difficulties in collection

▪ As security for, or in total or partial satisfaction of, a preexisting claim

▪ By accepting delivery under a preexisting K for purchase

▪ In return for any consideration sufficient to support a simple K

Rights in the Collateral

• The debtor must have rights in the collateral before a security interest can attach

o Thrift, Inc. v. ADE, Inc.

▪ ADE sells three cars to debtor but retains the pink slips and says no transferring title until the cars are paid for. Thrift is a secured creditor with an interest in debtor’s inventory—they give debtor money and take an interest in the cars. Debtor’s check to pay for the cars bounces. ADE says debtor did not have sufficient interest in the cars to grant a security interest. Court disagrees and says when debtor took possession of the cars pursuant to the K of sale, that was sufficient interest in the cars to grant a security interest in them.

▪ ADE also tries to say they are a secured party. Bad news for them is that keeping the pink slip is not the way to perfect in a car in that state, so they are an unperfected secured party and lose to Thrift who perfected.

o In re Howell Enterprises

▪ BS wants to buy rice on credit. Tradax will do the deal on credit, Howell will not. BS will not deal with Tradax. So Howell and Tradax make deal where Howell will be the nominal seller and Tradax will supply the rice and be the recipient of the letter of credit. First National has a security interest in Howell’s accounts receivable. In the books it appears that Howell has an account receivable from BS and an account payable to Tradax. First National says they have an interest in the account. Court says Howell did not have sufficient rights in the letter of credit to grant a security interest to First National—they had no interest at all, and were just agents for Tradax. Tradax wins.

o Note that the code is not clear on when someone has sufficient rights in the collateral

• A buyer will get an interest in goods when they are marked for shipping or sale

o 2-501

Perfection of the Security Interest

Generally

• 9-308

o A security interest is perfected if it has attached and all of the applicable requirements for perfection in 9-310 are satisfied. A security interest is perfected when it attaches if the applicable requirements are satisfied before the security interest attaches

o There are similar requirements for an agricultural lien

o Continuous perfection/Perfection in Supporting Obligation

▪ Are under Automatic Perfection

o Perfection of a security interesting a right to payment or performance also perfects a security interest in a security interest, mortgage, or other lien on personal or real property securing the right

o Perfection of a security interest in a securities account also perfects a security interest in the security entitlements carried in the securities account

o Perfection of a security interest in a commodity account also perfects a security interest in the commodity contracts carried in the commodity account

Choice of Law in Multi-State Transactions

• The following rules determine the law governing perfection – 9-301

o While a debtor is in a jrdx, the local law of that jrdx governs perfection, the effect of perfection or nonperfection, and the priority of a security interest in collateral

o While collateral is located in a jrdx, the local law of that jrdx governs perfection, the effect of perfection or nonperfection, and the priority of a possessory security interest in that collateral

o While tangible negotiable documents, goods, instruments, money, or tangible chattel paper is located in a jrdx, the local law of that jrdx governs

▪ Perfection of a security interest in the goods by filing a fixture filing

▪ Perfection of a security interest in timber to be cut

▪ The effect of perfection or nonperfection and the priority of a nonpossessory security interest in the collateral

Possession

• 9-313: Possession by or Delivery to Secured Party Perfects Security interest without Filing

o Except as otherwise provided, a secured party may perfect a security interest in tangible negotiable documents, goods, instruments, money, or tangible chattel paper by taking possession of the collateral.

o For goods covered by a certificate of title, a secured party may perfect a security interest in the goods by taking possession of the goods only in the circumstances described in 9-316(d)

o Discusses collateral in the possession of a person other than the debtor

o If perfection depends on possession, then perfection occurs no earlier than when the secured party takes possession and continues only while the secured party has possession

• Goods covered by a negotiable document can be perfected by perfecting a security interest in the document

o 9-312(c): while goods are in the possession of a bailee that has issued a negotiable document covering the goods,

▪ A security interest in the goods may be perfected by perfecting a security interest in the document, and

• And can perfect a tangible negotiable instrument by possession—so can perfect an interest in the goods by possession of the document

▪ A security interest perfected in the document has priority over an security interest that becomes perfected in the goods by another method during that time

o Note that if are using a bailee, the bailee must be a neutral party

▪ 7-104 states a kind of negligence or malpractice standard for warehouse operators, might be situations where would try to argue this should apply to sham warehouses

Automatic

• Some security interests are perfected when they attach – 9-309

o Purchase money security interest in consumer goods (some exceptions)

o An assignment of accounts or payment intangibles which does not by itself or in conjunction with other assignment to the same assignee transfer a significant part of the assignor’s outstanding accounts or payment intangibles

▪ Comment 4 – a causal and isolated assignment of accounts receivable (things no one would think of filing)

▪ In re Wood

• SP loaned his buddy 10K. Wanted assurance of payment so took an assignment of a couple of cases the debtor had. Debtor bankrupt before SP files. Debtor says unsecured and so can be avoided, SP says a casual and isolated assignment of accounts receivable. Court notes that while statute indicates significant amount of debtor’s accounts, comments indicate a casual or isolated transaction. Court says only have to meet one test and that the casual and isolated transaction was satisfied.

• Hull says do not rely on this—court putting more weight on the comments than on the statute. Should file. Code section really on here to protect those that do not know what they are doing

o Sale of a payment intangible

o Sale of a promissory note

▪ This is to protect a buyer of promissory notes in case the debtor goes bankrupt before the notes are physically transferred

o Security interested created by the assignment of a health-care-insurance-receivable to the provider of the health-care goods or services

o Security interest in investment property created by a broker or securities intermediary

o Security interest in a commodity contract or a commodity account created by a commodity intermediary

o An assignment for the benefit of all creditors of the transferor and subsequent transfers by the assignee thereunder

o Security interest created by an assignee of a beneficial interest in a decedent’s estate

o Sale by an individual of an account that is a right to payment of winnings in a lottery or other game of chance

o There are a few others relating to other sections of the UCC

• Continued Perfection

o 9-308(c)

▪ Security interest or agricultural lien is perfected continuously if it is originally perfected by one method under this article, and later perfected by another method under this article, without an intermediate period where it was unperfected

o 9-308(d)

▪ Perfection of a security interest in collateral also perfects a security interest in a supporting obligation for the collateral

• Note that 9-203(f) states that the attachment of a security interest in collateral gives the secured party the rights to proceeds in 9-315 and is also attachment of a security interest in a supporting obligation for the collateral

• Therefore, if perfect a security interest in an account, also perfect a security interest in the supporting obligation of the account

Temporary

• 9-312(e): Temporary perfection: new value

o A security interest in certificated securities, negotiable documents, or instruments is perfected without filing or the taking of possession or control for a period of 20 days from the time it attaches to the extent that it arises for new value given under an authenticated security agreement

▪ Without possession of the document, there is temporary perfection for 10 days without filing

• 9-312(f): Temporary perfection: goods or documents made available to the debtor

o A perfected security interest in a negotiable document or goods in possession of a bailee, other than one that has issued a negotiable instrument for the goods, remains perfected for 20 days without filing if the secured party makes available to the debtor the goods or documents representing the goods for the purpose of

▪ Ultimate sale or exchange

▪ Loading, unloading, storing, shipping, transshipping, manufacturing, processing, or otherwise dealing with them in a manner preliminary to their sale or exchange

o You rely on this provision at your peril

▪ If you release and the court says this does not apply—you are screwed

• 9-312(g): Temporary perfection: delivery of a security certificate or instrument to debtor

o A perfected security interest (by possession) in a certificated security or instrument remains perfected for 20 days without filing if the secured party delivers the certificate or instrument to the debtor for the purpose of

▪ Ultimate sale or exchange, or

▪ Presentation, collection, enforcement, renewal, or registration of transfer

o Even though you can be temporarily perfected, it is not a good idea to use this provision—the secured party is taking a huge risk.

Filing

• The Key Rule - 9-310

o General Rule: perfection by filing

▪ Except as provided in (b) and 312(b), a financing statement must be filed to perfect all security interests and agricultural liens

o Exceptions: filing not necessary

▪ Do not have to file in order to perfect a security interest:

▪ Perfected under 9-308(d), (d), (f), (g)

▪ Perfected under 9-309 when it attaches

▪ In property subject to a statute, regulation or treaty described in 9-311(a)

▪ In goods in possession of a bailee perfected under 9-312(d)(1) or (2)

▪ In certificated securities, documents, goods, or instruments which is perfected without filing, control, or possession under 9-312(d),(f),(g)

▪ In collateral un the secured party’s possession under 9-313

▪ In a certificated security which is perfected by delivery of the security certificate to the secured party under 9-313

▪ In deposit accounts, electronic chattel paper, electronic documents, investment property, or letter of credit rights which is perfected by control under 9-314

▪ In proceeds which is perfected under 9-315

▪ Perfected under 9-316

o Assignment of Perfected Security Interest

▪ If a secured party assigns a perfected security interest or agricultural lien, a filing under this article is not required to continue the perfected status of the security interest against creditors of and transferees from the original debtor

• Financing Statement

o 9-502(a): A financing statement is sufficient only if it

▪ Provides the name of the debtor

▪ Provides the name of the secured party or a representative of the secured party

▪ Indicates the collateral covered by the financing statement

o A financing statement may be filed before a security agreement is made or a security interest otherwise attaches – 9-502(d)

▪ Note—that the financing statement still will not be effective until the security interest attaches

• Where to File – 9-501

o Unless otherwise provided, the local law of the state governs perfection of a security interest or agricultural lien, the office in which to file a financing statement to perfect the security interest or agricultural lien is

▪ The office designated for the filing or recording or a record of a mortgage on the related real property if

• Collateral is timber

• Financing statement is filed as a fixture filing and the collateral is goods that are or are to become fixtures

▪ The office of [ ] or any office authorized by [ ] in all other cases

• Generally this will be the secretary of state

• A security interest in chattel paper, negotiable documents, instruments, or investment property may be perfected by filing – 9-312(a)

o Even though the interest can be perfected by filing, the most common way to perfect these interest is through possession

• If the clerk screws up, the burden is on the party that is searching the records

o 9-517

▪ The failure of the filing office to index a record correctly does not affect the effectiveness of the filed record.

• A filed financing statement is only good for 5 years

o 9-515(a)

▪ Filed financing statement is effective for 5 years after filing

o 9-515(c)

▪ The effectiveness of the financing statement lapses unless before the time for expiration a continuation statement is filed. Once it lapses, the financing statement is no longer effective and the interest becomes unperfected (unless it also perfected in a manner other than filing).

• If it becomes unperfected—it is deemed never to have been perfected as against a purchaser of the collateral

o This alters priority

• Remember that “purchase” under the UCC includes taking a security interest

o 9-515(d)

▪ The continuation statement can only filed within 6 months before the expiration of the 5 year period.

o 9-515(e)

▪ If a continuation statement is filed, the financing statement will be effective for another 5 years, starting on the date the initial financing statement would have become ineffective. After the next five years, have to file another continuation statement or it will lapse.

o Once there is a lapse, filing a week late will not resurrect the previous filing. The priority starts from the new filing.

Control

• Perfection by control can occur with three types of collateral – 9-314

o Investment property—stocks, bonds, publicly traded securities

▪ 9-312(a) shows that can also perfect investment property by filing a financing statement

o Deposit accounts

▪ 9-312(b) shows that can only perfect an interest in deposit accounts by taking control

o Rights under a letter of credit

▪ 9-312 (b) cannot file unless provided in 9-308(d)

• Can only file to perfect if perfection of a security interest in collateral perfects a security interest in the underlying collateral

o Ex: letter of credit as a supporting obligation to an account—perfecting the interest in the account perfects the interest in the letter of credit

• A party might want to perfect through control because it yields a better result in priority disputes

o Note that under 9-314(b) the security interest is perfected when the SP obtains control and remains perfected by control onl while the SP retains control

• Control of a security entitlement – 8-106 (9-106 says control as provided in 8-106)

o A purchaser had control of a security entitlement if

▪ The purchaser becomes the entitlement holder

• They can put their name on the account

▪ The securities intermediary has agreed it will comply with orders from the purchaser without consent by the entitlement holder

▪ A third party holds the security entitlement in their name on behalf of the purchaser and allows the purchaser to access the entitlement

• Control over Deposit Accounts – 9-104(a)

o A secured party has control of a deposit account if

▪ Secured party is the bank with which the deposit account is maintained

▪ There is an agreement between the SP, debtor and the bank that the bank will comply with instructions originating from the SP

▪ Secured party becomes the bank’s customer with respect to the deposit account

• This is the safest method—put the account in your name

• Control of Letter of Credit Right – 9-107

o SP has control of a letter of credit right if the person has consented to assignment of proceeds of the letter of credit

What State to File In

• File in the state where the debtor is located – 9-307

o Individual—principle residence

o US registered organization—state of organization (incorporation)

o Other organization—place of business, if more than one place of business then at the chief executive office

o If location outside the US, foreign jrdx only if it has a filing system, otherwise DC

Continued Perfection Following a change in governing law

• If the debtor moves

o Under 9-316(a)(2) there is a grace period of 4 months to file in the new jrdx when the debtor moves

• If the collateral moves to a new entity

o Under 9-316(c) there is a 1 year grace period after a transfer of collateral to a person that then becomes the debtor and is located in another jrdx

• Goods under certificate of title

o Under 9-316(d) Security interest in goods covered by a certificate of title which is perfected by any method under the law of another jrdx when the goods become covered by a certificate of title from this state remains perfected until the security interest would have become unperfected under the law of the other jurisdiction

▪ But under 9-316(e) the security interest in (d) will be unperfected as against a purchaser of the goods for value and is deemed never to have been perfected against a purchaser of goods for value if the requirements of 9-311(b) or 9-313 are not met before

• Time security interest would have become unperfected under the law of the other jurisdiction had the goods not become covered by a certificate of title from this state, or

• The expiration of 4 months after the goods had become so covered

Certificates of Title

• 9-303 covers certificates of title

o The local law of the jrdx under whose certificate of title the goods are covered governs perfection, the effect of perfection or nonperfection, and the priority of a security interest in goods covered by a certificate of title from the time the goods became covered by the certificate or title until the goods cease to be covered by the certificate of title

▪ Under this provision the UCC does not really care whether the debtor has any relationship with the state issuing the certificate of title—just care if one has been issued

▪ If a state has a certificate of title governing the item, that state’s law should govern the item

Termination Statements

• 9-513(a) –Consumer Goods

o SP shall file a termination statement if the financing statement covers consumer goods and

▪ No obligation secured by the collateral covered by the financing statement and no commitment to make an advance, incur an obligation or otherwise give value, or

▪ The debtor did not authorize the filing of the initial financing statement

o SP shall file the termination statement

▪ Within 1 month after there is no obligation secured by the collateral covered by the financing statement and no commitment to give value

▪ If earlier, within 20 days after the SP receives an authenticated demand from the debtor

• 9-513(b) – Other collateral

o In cases that are not consumer goods, within 20 days after a SP receives an authenticated demand from a debtor, the SP shall to the debtor a termination statement or file the termination statement in the office, if

▪ Except in the case of financing statement covering accounts or chattel paper that has been sold or goods that are the subject of a consignment, there is no obligation secured by the collateral covered by the financing statement and no commitment to give value

▪ The financing statement covers accounts or chattel paper that has been sold but as to which the account debtor or other person obligated has discharged its obligation

▪ The financing statement covers goods that were the subject of a consignment to the debtor but are not in the debtor’s possession, or

▪ The debtor did not authorize the filing of the initial financing statement

• 9-513(d)

o Upon the filing of the termination statement, the financing statement ceases to be effective

• 9-509(d)

o A person can file an amendment to a financing statement (other than one that adds collateral or adds a debtor) only if

▪ The SP of record authorizes the filing, or

▪ The amendment is a termination statement for a financing statement of which the SP of record has failed to file or send a termination statement as required, the debtor authorized the filing, and the termination statement indicates that the debtor authorized it to be filed

• This is not as good as when the SP files it—since it says the debtor was the one to file it can lead to questions of reliability because the record will stay there until one ear after the financing statement lapses (9-519(g))

• 9-518(a) Correction Statement

o A person may file in the filing office a correction statement with respect to a record indexed there under the person’s name if the person believes that the record is inaccurate or was wrongfully filed

Priority Disputes

Generally

• The Golden Rule of Article 9 – 9-201

o The general rule is that the secured party wins

▪ Unless can point to something in the UCC that says SP does not win

o Slightly tarnished Golden Rule

▪ Federal law might come into play and affect who wins

• Ex: bankruptcy code

• The priority disputes are settled by 9-317 through 9-339

Perfected Secured Party v. Perfected Secured Party

• First to file or perfect

o 9-322(a)(1)

▪ Conflicting perfected security interests and agricultural liens rank according to priority in time of filing or perfection. Priority dates from the earlier of the time a filing covering the collateral is first made or the security interest or agricultural lien is first perfected, if there is no period thereafter when there is neither filing nor perfection

o It does not matter whether one party is aware or the others security interest or not—knowledge is irrelevant

▪ It is a pure race system of notice—first one to the filing office will win

o Making a future advance does not mean the SP has to file a new financing statement

▪ Comment 3, Ex 1 to 9-323(a)

• Ex: SP 1 loans and perfects, SP 2 loans and perfects. D pays SP1 but no termination, SP 1 extends additional credit and a new security agreement but does not file again. The original filing statement is ok. First to file of perfect wins.

• Exception: PMSP v. NonPMSP

o 9-324(a) General Rule: purchase money priority

▪ Except as otherwise provided, a perfected PMSI in goods other than inventory or livestock has priority over a conflicting security interest in the same goods, and except as otherwise in 9-327, a perfected security interest in its identifiable proceeds also has priority, if the PMSI is perfected when the debtor receives possession of the collateral or within 20 days thereafter

▪ 20 grace period to perfect a PMSI and get priority

o When does the 20 days start—with possession of the collateral or the day the security interest was actually created?

▪ It is the day the security interest is created.

• Debtor—owns the collateral. Collateral—property subject to a security interest. Therefore, you cannot have collateral until you have a security interest, and so you cannot have a debtor until then.

• No debtor in possession of the collateral until there is a security interest

o 9-324(b) Special Rule for PMSI in Inventory (and Livestock(d))

▪ The PMSP wins if

• The PMSI is perfected at the time D receives possession of the collateral

o No 20 day grace period

• Notification must be given to prior filed secured parties (of conflicting interests)

• Notice must indicate an intent to acquire security interest, must describe the inventory

• Notice must be received by the holder of the conflicting SP within 5 years before the D receives possession of the inventory

o After 5 years would have to give notice again

▪ Difference between (a) and (b)

• In (a) priority extends to identifiable proceeds

• In (b) the priority only extends to what is listed in the statute

o And noticeably absent is accounts receivable

▪ The PMSI in inventory is more limited than for other collateral

▪ Kunkel v. Sprague National Bank

• Sprague has a floating lien over debtor’s cattle, equipment, and inventory. The seller sold cattle to the debtor and retained a PMSI in the cattle, but never delivered the cattle t the debtor—when cattle sold the proceeds went to the debtor. Fight between PMSI and holder of floating lien. PMSI says Sprague never had security interest in cattle because debtor did not have sufficient rights—court says Art. 9 does not answer the question. Looks to Art. 2 and says not necessary for buyer to have title goods to have sufficient rights to grant security interest—there were sufficient rights in the collateral to grant a security interest. The cattle here are inventory (held for sale to others), so for PMSI to have priority they have to meet the special rules for PMSI in inventory. Here there was no notice to Sprague—but court says that notice to be given before debtor receives collateral, and here debtor never received the collateral…so PMSP did not have to send notice.

• Also issue with PMSI in proceeds they do not reach accounts. Arguably selling cattle and having them graded and yielded (killed and slaughtered) to determine their price creates a delay between when cattle sold and the money coming to the seller and is an account. Court says parties were contemplating a cash sale and not the creation of an account and sale of goods on credit—the only way a cash sale can go forward with cattle is through grade and yield. PMSP prevails.

▪ Note that under 9-103(d) a security interest of a consignor in goods is a PMSI in inventory. So the consignor needs to comply with 9-324(b) and be perfected when giving the goods to the debtor and needs to send notice.

• Conflicting Purchase Money Security Interests

o 9-314(g)

▪ If more than one security interest qualifies for priority in the same collateral as PMSI, PMSI in inventory/livestock/software:

• A security interest securing an obligation incurred as all or part of the price of the collateral has priority over a security interest securing an obligation incurred for value given to enable the debtor to acquire rights in or use the collateral; and

• In all other cases, 9-322(a) applies to the qualifying security interest

▪ Comment 13

• Grants priority to purchase money security interests securing the price of collateral (created in favor of the seller) over purchase money security interest that secure enabling loans.

• First to file or perfect governs multiple security interests securing enabling loans.

Unperfected Secured Party v. Perfected Secured Party

• A perfected secured party will win over an unperfected secured party

o 9-322(a)(2)

▪ A perfected security interest or agricultural lien has priority over a conflicted unperfected security interest or agricultural lien

o Galleon Industries, Inc. v. Lewyn Machinery Co.

▪ Goods mistakenly shipped to buyer of goods. Goods were supposed to be held until paid because seller did not want to extend buyer credit. Manufacturer accidentally sent goods. Seller then sent buyer an invoice saying they had to pay in 30 days. A bank had a floating lien on the buyer’s equipment. Court determined that sending the bill meant the seller became a secured creditor—and a PMSP because were trying to retain an interest in the equipment to secure the price. Since seller did not file, they were unsecured. Bank with floating lien was secured and wins.

Lien Creditor v. Unperfected Secured party

• Lien creditor – 9-102(a)(52)

o Lien creditor is

▪ A creditor that has acquired a lien on the property involved by attachment, levy or the like

▪ An assignee for benefit of creditors from the time of assignment

▪ A trustee in bankruptcy from the date of the filing of the petition, or

▪ A receiver in equity from the time of appointment

• A security interest is subordinate to the rights of a lien creditor that becomes a lien creditor before the security interest is perfected

o 9-317(a)(2)

▪ A security interest or agricultural lien is subordinate to the rights of

• (Unless provided in (e) for PMSI) A person that becomes a lien creditor before the earlier time of

o The security interest or agricultural lien is perfected, or

o One of the conditions specified in 9-203(b)(3) is met and a financing statement covering the collateral is filed

o The gap lien creditor prevails—party that comes in between when the security interest created and perfected (although there are exceptions)

▪ This is an example of where the code holds a club over the SP head—tells SP that if they do not perfect they are going to lose

• Exception for PMSI within 20 days of the debtor receiving the collateral

o 9-317(e)

▪ Except as otherwise provided, if a person files a financing statement with respect to a purchase money security interest before or within 20 days after the debtor receives delivery if the collateral, the security interest takes priority over the rights of a buyer, lessee, or lien creditor which arise between the time the security interest attaches and the time of filing

▪ Although normally a gap lien creditor defeats an unperfected secured party, here the 20 day grace period gives a PMSI a chance to get priority

Buyers v. Secured Party

• Secured Party argues that unless the UCC otherwise provides, a security interest is good against the world – 9-201

o Normally the security interest will follow the collateral into the hands of the buyer – 9-315

• Exception: Buyer in the ordinary course of business

o Definition: 1-201(a)(9)

▪ A person that buys goods in good faith, without knowledge that the sale violates the rights of another person in the goods, and in the ordinary course from a person (other than pawnbroker) in the business of selling goods of that kind

• Person buys goods in the ordinary course if the sale to the person comports with the usual or customary practices in the kind of business in which the seller is engaged or with the seller’s own usual or customary practices

• Does not include a person that acquires goods in a transfer in bulk

o A person can buy a large quantity of goods and still be a buyer in the ordinary course

▪ Just cannot be a buyer in bulk (a defined term)—cannot buy all of someone’s inventory

• Does not include a person that acquires goods as security for or in total or partial satisfaction of a money debt

o There needs to be new value—this creates proceeds that the SP can go after

▪ International Harvester Co. v. Glendenning

• Buyer bought tractors from a dealer. Knew how the dealers were financed (SI in inventory and then SP has right to proceeds when they sell). Buyer entered into K to buy tractors and bought less than FMV—and knew they were worth more than paid. Knew and saw dealer make a fake fill of sale. Buyer sells tractors at a profit. Bank sues buyer for conversion—buyer says is a buyer in the ordinary course and the SI was cut off. Court says buyer acted in bad faith and so is not a buyer in the ordinary course.

▪ Buyer of used goods can still be a buyer in the ordinary course of business

o A buyer in the ordinary course of business will win over a SP with a security interest in the seller’s goods—buyer in ordinary course takes free of security interest - 9-320(a)

▪ Except as in (e), a buyer in the ordinary course of business, other than a person buying farm products from a person engaged in farming operations, takes free of a security interest created by the buyer’s seller, even if the security interest is perfected and the buyer knows of its existence.

• Comment 3: Definition of buyer in the ordinary course says it is ok to know there is a security interest, but if the buyer knows they are violating the terms of the security interest, they are no longer a buyer in the ordinary course of business

▪ First National v. Ford Motor Credit Co.

• Debtor a car dealership. Ford gives financing for inventory—floor plan financing. Guys at dealership look like they are purchasing inventory and get a bank to give them credit like they are buying the cars but they leave the cars on the lot to sell. Ford says they have an SI in the inventory, bank says they have priority in the two cars they gave loans for because the buyers were buyers in the ordinary course of business that cut off the SI. Court says they were not buyers in the ordinary course because they did not meet the requirement of being good faith and lack of knowledge that are violating a security agreement—agreement says can only sell in ordinary course of dealer’s business and here were buying for wholesale.

• This would normally not affect the buyer’s status—but in this case the guys knew they were violating the agreement

o Garage Sale Exception – 9-320(b)

▪ Applies only if the goods in the hands of the seller were consumer goods

▪ They must be consumer goods in the hands of the buyer

▪ Must act without knowledge of the competing interest

▪ Must give value

▪ Must be before the financing statement filed

o Note 9-320(e): This section does not affect the security interest in goods in the possession of the secured party

▪ SP will retain priority if retain possession

▪ This rule gives the SP a way to ensure they are paid

• Exception: Buyers of instruments, securities and chattel paper

o 9-330

o 9-331

▪ A holder in due course takes priority over any interests, even if they are perfected interests

• 3-302: holder in due course

o Holder of an instrument if holder took the instrument for value, in good faith, without notice that it is overdue or dishonored, without notice the signature is unauthorized or altered, without notice of another claim to the instrument, without notice a party has a claim to recoupment

• 3-305 lists defenses that can be asserted against a holder in due course

o Do not include a claim of an Art. 9 secured party

▪ Art. 9 will yield to negotiable instrument law if contest between holder in due course of an instrument and a secured party

• Ex of negotiable instrument: check, promissory note

• Buyers not in the ordinary course of business

o Buyers not in the ordinary course of business generally take the goods subject to the security interest

▪ Exception: 9-320(b)

• The garage sale exception (see above) that applies for consumer goods

▪ Exception: 9-317(b)

• Buyer has priority if the buyer (1) gets delivery, (2) pays value, and (3) does not know of the security interest, and all of this occurs before the security interest is perfected

o This is still subject to the rights of a secured party with a PMSI to file a financing statement within 20 days under 9-317(e)

• This is the gap lien buyer—buy the collateral between the time the delivery occurs and before there is perfection

• Buyers of farm products

o The federal Food Security Act—7 USC 1631—has preempted the UCC in some areas

▪ Scheme for perfection of SI in farm products and notice to buyers of the security interest

• Two ways for buyers to learn of the interests

o State set up central filing system where buyers of products and SPs can indicate their interests

▪ Sec of state notify the buyer of the SI, and buyer has to pay lender to take free of the SI

o If you are a secured lender, you need to ask the debtor to tell you who they sell farm products to

▪ Debtor required by law to tell SP who they do business with

▪ SP will send notice to buyers saying they must remit funds to the SP to be free of the SI

▪ If SP does not give notice then the buyer takes free of the SI

▪ Farm Credit Bank of St. Paul v. F & A Dairy

• Application of Food Security Act. SP had SI in dairy farmer’s milk and proceeds from sale of milk and milk products. SP dealt with dairy that bought from farmer that remitted to the lender. Farmer changed dairies. SP gave notice to dairy as required under the Act. Dairy refused to remit proceeds to lender unless farmer signed an assignment of proceeds to the bank. Farmer did not, dairy kept giving money to farmer. Bank sued. For all sales where the dairy had received notice from the bank, they were not clear of the Act and SP has a cause of action for conversion. Have to remit directly to the SP after receiving notice.

o Note that 9-320(a) does not allow a buyer in the ordinary course of business of farm products to defeat the SP when farm products are involved

▪ Buyer in the ordinary course of buying farm products are not protected from Art. 9

o Clovis National Bank v. Thomas

▪ Debtor in cattle business. SI said bank had to consent to selling cattle, bank still let debtor do it without consent. Bank not strong about saying you have to remit proceeds to us as condition of sale. Since bank did not aggressively assert their rights, the court said there was a waiver. Through course of dealing there was an agreement the farmer could sell and the auctioneer did not have to remit the proceeds to the bank.

▪ This case shows that you should assert the rights you have in a K

Lessees v. Secured Party

• Lessees will generally take the interest subject to the security interest

o 2A-307

▪ Creditor of a leesee takes subject to the lease K

▪ Creditor of a lessor takes subject to the lease L unless the creditor holds a lien that attached to the goods before the lease K became enforceable

▪ Lessee takes a leasehold interest subject to a security interest held by a creditor of the lessor

• Exception: Lessee in the ordinary course of business can take free of the security interest

o 9-321(c)

▪ A lessee in ordinary course of business takes its leasehold interest free of a security interest in the foods created by the lessor, even if the security interest is perfected and the lessee knows of its existence

o 2A-103(u) Lessee in the ordinary course of business

▪ A person that leases goods in good faith, without knowledge that the lease violates the rights of another person, and in the ordinary course from a person (other than pawnbroker) in the business of selling or leasing goods of that kind

• Person leases in ordinary course if the lease to the person comports with the usual or customary practices in the kind of business in which the lessor is engaged or with the lessor’s own usual or customary practices

• Person that acquires goods in a transfer in bulk or as a security for or in total or partial satisfaction of a money debt is not a lessee in the ordinary course of business

• Special Rights of Creditors

o 2A-308

▪ Creditor of a seller may treat a sale of identification of goods to a K for sale as void if as against the creditor retention of possession by seller is fraudulent under any statue or rule of law, but retention of possession of the goods pursuant to a lease K entered into but the seller as lessee and the buyer as lessor in connection with the sale of identification of the goods is not fraudulent if the buyer bought for value and in good faith

• If transaction in good faith and for value—it is not fraudulent

Disputes over deposit accounts, investment property and letters of credit

• There are special rules that govern priority among conflicting security interests in the same investment property – 9-328

o (1) Between a SP with control over investment property and an SP that has perfected by filing, the SP with control wins.

o (2) If both creditors have control, priority ranks according to the time of

▪ If collateral is a security, obtaining control

▪ If the collateral is a security entitlement carried in a securities account and

• The secured party becomes the entitlement holder (under 8-106(d)(1)) – this locks in priority

• Secured party gets control under 8-106(d)(ii) where the securities intermediary agrees to comply with orders from the purchaser—it is first in time, first in right (first to get intermediary to agree to comply)

• If control obtained through use of a third person, then the time of priority would be based as if the other person were the secured party

o (3) An interest held by a securities intermediary in a security entitlement or account maintained with the intermediary has priority over a security interest held by another party

• There are special rules that govern priority among conflicting security interests in deposit accounts – 9-327

o Security interest of a party with control wins over a party that does not have control

o Security interest interests perfected by control rank according to time that the party obtained control

▪ Except: security interest held by the bank with which the deposit account is maintained has priority over a conflicting secured party

▪ Except: security interest perfected by control under 9-104(a)(3)—secured party becomes the bank’s customer with respect to the account—has priority over a security interest held by the bank

• There are special rules that govern priority of conflicting security interests in letter of credit rights – 9-329

o Security interest held by a secured party having control of the letter of credit right under 9-107 has prioriy to the extent of its control over conflicting security interest held by a party that does not have control

o Security interests perfected by control rank according to priority in time of obtaining control

Article 2 Interests v. Secured party

• Possible ability under Art. 2 to protect buyers that would lose to the secured party under Art. 9

o 2-403 Entrustment

▪ (1) A purchaser of goods acquires all title that the purchaser’s transferor had or had power to transfer; a person with voidable title has the power to transfer a good title to a good faith purchaser to value

▪ (2) Any entrusting of goods to a merchant that deals in goods of that kind gives the merchant power to transfer all of the entruster’s rights to the goods and to transfer the goods free of any interest if the entruster to a buyer in the ordinary course of business

• Under 9-320, comment 3, ex. 2 – a lender can be an entruster

• So if lender knows what is going on and acquiesces, it may be their rights that end up being sold

• Under Art. 2, the buyer may get a security interest in the goods

o 2-711(c)

▪ On rightful rejection of revocation of acceptance, a buyer has a security interest in goods in the buyer’s possession or control for any payments made on their price and any expenses reasonably incurred in their inspection, receipt, transportation, care and custody and may hold such goods and resell them in a like manner as an aggrieved seller

o 9-110 resolves the priority contest

▪ A security interest arising under 2-711 is subject to Art. 9, but until the debtor obtains possession of the goods

• The security interest is enforceable even if 9-203 not satisfied

• Filing is not required to perfect the security interest

• The rights of the secured party after default by the debtor are governed by Art. 2

• The security interest has priority over a conflicting security interest created by the debtor

• Potential way to use Art. 2 to protect a buyer not in the ordinary course of business

o If goods are sold subject to a security interest and the buyer is not aware of the security interest at the time of purchase, the seller has then breached the warranty of title under 2-312. The buyer can revoke acceptance, and when revoke can claim a security interest in the goods under 2-711(c). Then, the buyer can claim priority over the seller’s secured party by 9-110.

Note: There are remedies under Art. 2 if a seller discovery the buyer is insolvent – 2-702

• If seller discovers the buyer is insolvent, seller may refuse delivery except for cash including payment for all goods theretofore delivered under the K, and stop delivery

• If seller discovers that buyer has received goods on credit while insolvent, the seller may reclaim the goods upon demand made within a reasonable time after the buyer’s receipt of the goods.

o In re Arlco, Inc.

▪ SP is a purchaser, have given value, are acting in good faith. Seller says that because SP cut off financing to debtor that was not in good faith. Court says SP does not have to keep financing an insolvent debtor—that is not bad faith. The floating lien holder with an interest in inventory can defeat an unpaid seller of goods asserting a reclamation right.

• The seller’s right to reclaim is subject to the rights of a buyer in the ordinary course of business or other good faith purchaser for value.

o Successfully reclaiming to goods excludes all other remedies with respect to them

Secured Party v. Statutory Lienholder

• Laws relating to statutory liens are generally under non-uniform state law—Art. 9 does discuss priority contests with statutory liens

o 9-333 Priority of Certain Liens Arising by Operation of Law

▪ A possessory lien means an interest, other than a security interest or an agricultural lien

• Which secures payment or performance of an obligation for services or materials furnished with respect to goods by a person in the ordinary course of the person’s business

• Which is created by statute or rule of law in favor of the person

• Whose effectiveness depends on the persons’ possession of the goods

▪ A possessory lien on goods has priority over a security interest in the goods unless the lien created by a statute that expressly provides otherwise

o If it is a statutory lien and not a possessory lien, the court can use whatever priority rules they want—it does not fall under Art. 9

Secured Party v. Fixture Claimant

• Fixtures are a mixed animal—security interests can be created either under Art. 9 or real estate law

o Typically fixtures are personal goods and then attach to real property

▪ 9-102(a)(41) defines fixtures

• Goods that have become so related to particular real property that an interest in them arises under real property law

o Security interest can be created in fixtures under Art. 9

▪ 9-334(a)

• A security interest may be created in goods that are fixtures or may continue in goods that become fixtures

• Security interest does not exist in ordinary building materials incorporated into an improvement on land

▪ 9-502 says how to perfect a security interest in fixtures

• File a financing statement with the sec of state’s office

• Fixture filing—a special type of financing statement that is to be put in the real property records

o How to file a fixture filing

▪ 9-102(40) Definition of fixture filing

• The filing of a financing statement covering goods that are or are to become fixtures and satisfying 9-502(a) and (b); the term includes the filing of a financing statement covering goods of a transmitting utility which are or are to become fixtures

▪ 9-502

• (a) Financing statement sufficient only if it

o Provides the name of the debtor

o provides the name of the SP

o Indicates the collateral covered by the financing statement

• (b) Fixture filing must have (a) and

o Indicate that it covers this type of collateral

o Indicate that it is to be filed in the real property records

o Provide a description of the real property to which the collateral is related

o If the debtor does not have an interest of record in the real property, provide the name of a record owner

• Resolving the priority contest

o If the priority contest is with a real estate interest - 9-334

▪ The general rules is that the real estate interest wins, unless there is an exception in 9-334

• Exception for fixtures if it is a PMSI and the interest, the interest if the owner arise before the goods became fixtures, interest is perfected by fixture filing before goods become fixtures or within 20 days thereafter

• Some situations where the debtor has an interest of record in the real property

• SI is perfected before the goods become fixtures and the fixtures are removable

o This is for replacement of domestic appliances that are consumer goods

• Conflicting interest is a lien on the property obtained by a legal proceeding after the interest perfected

• Stuff with manufactured homes and perfected pursuant to statute

• Security interest in fixtures has priority in situations where the encumbrancer or owner is consenting to the security interest or the debtor has the right to remove the goods as against the excumbrancer or owner

• Note that a construction mortgage will have priority over a security interest in fixtures (even PMSI) if a record of the mortgage is recorded before the goods become fixtures and the goods become fixtures before the completion of the construction

o If the priority contest is not with a real estate interest, use other priority rules

• 5 questions to ask

o Is the good a fixture or will it become one?

▪ This is not resolved by Art. 9 and depends on the state you are in.

▪ George v. Commercial Credit Corp.

• Put motorhome on cinderblocks and applied for a permit to put a foundation under it. Filed a real estate mortgage in the real property office. Trustee says was a good and not a fixture and should follow Art. 9. Court looks at 1) physical annexation to realty, 2) if good applied in a way to further the purpose to which the realty is devoted, 3) intention of the person hooking up the good to make it a permanent accession to the freehold estate (suggests this is most important). Says looks like a fixture so ok to create the security interest under real estate law.

▪ Lewiston Bottled Gas Case

• Mortgage lender with properly recorded mortgage on real property. Mortgage covers after acquired fixtures. Guy building an inn. He Ks with company to provide heating and air conditioning units. K says are going to remain personal property even though attached to the property. Try to perfect by filing but use the wrong name. Bank makes another loan and searching the name does not show the lien. Under state law the units were fixtures—says determination is an objective test. Needed a proper fixture filing which was not done because the name was wrong.

o Has the security interest been perfected?

o Has a fixture filing been made?

o Priority contest with real estate interest?

o Real estate interest will win unless there is an exception in 9-334.

• A mortgage can be effective as a financing statement – 9-502(c)

o Needs to indicate the goods covered, goods are or are to become fixtures related to the real property described, satisfies the requirements for a financing statement, is recorded

• Remedies of a secured party with SP in fixtures

o If a secured party removes fixtures they may have to pay for the damage caused by the removal (but do not have to pay for diminution in value for removal)

▪ 9-604(d)

• SP that removes collateral shall promptly reimburse the owner of the real property, other than the debtor, for the cost of repair of any physical injury caused by the removal. SP does not have to pay for any diminution in the value of the real property caused by the absence of the goods removed or by any necessity of replacing them

o Person entitlement to reimbursement may refuse permission to remove until the secured party gives adequate assurance for the performance of the obligation to reimburse

o The drafters leave many questions related to what the SP can do open

▪ The SP can remove the fixtures

▪ Foreclosure on the property to pay for the fixtures?

• Maplewood Bank Case

o Contest between Sears with interest in fixtures and bank with trust deed on house. There was a foreclosure. Sears had priority over the fixtures. Sears tried to share in the proceeds when the bank foreclosed. Court said removal of the fixtures was the exclusive remedy.

o This case has been disproved.

• Commentators say it would be inappropriate to let the SP foreclose on the entire building—but if another party is foreclosing it makes sense to allow the fixture SP to share in the proceeds

Priorities in Accessions

• An accession is something that is installed into the good—someone has a security interest in what was attached to the larger good.

o 9-335

▪ A security interest can be created in an accession and continues in the collateral that becomes an accession.

▪ If a security interest is perfected when the collateral becomes an accession, the security interest remains perfected in the collateral

o 9-335(d)

▪ A security interest in an accession is subordinate to a security interest in the whole which is perfected by compliance with the requirements of a certificate of title statute.

o 9-335(e)

▪ After default, an SP may remove an accession from other goods if the security interest in the accession has priority over the claims of every person having an interest in the whole

• Commingling

o This occurs when goods are mixed together in such a way that they lose their separate identity

▪ Ex: Flour, eggs and milk that make a cake—cannot tell which security interest is which and each has a security interest in the cake at the end of the day

▪ 9-336

• A security interest can attach to product or mass. The security interest remains perfected if it was perfected before the collateral becomes commingled goods.

• If more than one security interest attaches to the product or mass,

o SI that is perfected before the mass becomes commingled goods is superior to an interest unperfected when the collateral becomes commingled

o If more than one interested is perfected when the collateral becomes commingled, the security interests rank equally in proportion to the value of the collateral at the time it became commingled goods

Secured Party v. Bankruptcy Trustee

• Generally (Page 231)

o BC 544

▪ (a)(1) The bankruptcy trustee has the rights of a judicial lien creditor

• If a financing statement is not filed when the debtor files for bankruptcy, a judicial lien creditor can defeat a secured party

o Another club over the head of the SP to file

o If the financing statement is filed then this strong arm provision will not work

• Trustee also defeats an unsecured party

• A PMSI retains their ability to file within the 20 day grace period

o BC 546

• Bankruptcy law does not allow a debtor to prefer certain creditors over others—if a preferential transfer is made, the bankruptcy trustee can undo them

o This is to stop creditors from acting like vultures and picking away at the debtor—either leaving nothing for other creditors or causing premature financial death

o Elements of preference:

▪ Transfer – when does it occur

• Defined in the code-any kind of shift in ownership in property, whether voluntary or involuntary

o So the creation of an SI is a transfer

o Creation of a judicial lien is a transfer

• For issues about when it occurs – BC 547(e)

o Two points of focus

▪ When SI created—when effective under state law

▪ When perfected—also under state law

o Normally time of transfer is the time the interest is created, if it is perfected within 10 days after creation. If perfected more than 10 days later, then the transfer is when it is perfected

▪ Note: The effect of perfecting more than 10 days later is often to lose the interest (can make it antecedent debt)

▪ For the benefit of a creditor

• SP is a creditor

▪ For an antecedent debt

• If at the time the transfer occurs the creditor is giving something to the debtor, arguably no vulture-like activity

▪ While debtor is insolvent

• Inability to pay debts when due

• Presumption that in the 90 days preceding bankruptcy the debtor is insolvent

▪ Transfer must be on or within 90 days before filing the petition

• This moves to 1 year for people that are insiders

o Ex: family

▪ Enables creditor to get more than they would have gotten in a liquidation

• Was the creditor made better off than if they had not made this transaction

o Even if these elements are met, it may still be unavoidable under 547(c)

▪ (2) cannot avoid a transfer to the extent it was a payment in the ordinary course of business

• Need debt incurred in the ordinary course, payment made in the ordinary course, terms of the loan ordinary

• Wolas

o Whether payment on bank loans would qualify for the exception. People generally thought it was meant for utilities. Court said should look at whether there is anything fishy about the loan—if it seems normal it should fall into the exception.

• So this exception can apply to bank loans and secured loans.

o This is not the vulture preference law tries to stop.

▪ (3) cannot avoid a transfer that creates a security interest in property acquired by the debtor as long as

• The SI secures new value that was

o Elements essentially boil down to secured party gets a PMSI

• That is perfected on or before 20 days after debtor gets possession of the property

▪ (4) unavoidable to the extent that after the transfer the creditor gave new value not secured by an enforceable security interest

• This rule looks at how much improvement there has been to the creditor—tries to stop the vulture-like activity to the extent the creditor has been improved

o Ex: D borrows money from bank. D pays 500. D borrows another 300 and gives bank interest in swords (that is unperfected). D goes bankrupt.

o The trustee can get back 200—the extent to which the SP was improved.

▪ (5) applies to accounts and inventory and their proceeds

• Determine position of the SP on the day 90 days before petition filed and the date of bankruptcy

• If there was a loan made in the period, look at when the loan created and then the time of bankruptcy

• Look for improvement

o If the value of the inventory increases on its own that is not considered a preference

▪ There is no transfer

o There needs to be new inventory brought in that increases in value to prejudice the other creditors

o It is not a preference unless the situation improves for the creditor in the 90 day period

o In re Smith’s Home Furnishings

▪ SI in inventory. Debtor paid SP out of proceeds of the sale. But proceeds would go into a commingled bank account. Unclear if SP getting paid from money that was not subject to SI. Debtor pays lender a lot during the time before bankruptcy. SP going to get fully paid. Trustee tries to say it was a preferential transfer because lender would get paid more than if liquidated. Court says the payments made did not satisfy 547(b). Says trustee has burden of proof on whether the transfer enabled the creditor to get more than they would have in liquidation—would have to show SP undercollateralized. Since they cannot do that, SP does not have to try and rely on (c)(5).

• Note: This case shows that have to go through the analysis under 547(b) before getting to the unavoidable situations in (c).

• Bankruptcy trustee can avoid fraudulent conveyances or transfers

o Trustee can avoid fraudulent conveyances under BC 548 or the state law and strong arm statute in 544

▪ Why one over the other?

• The length of the SOL

o Fraudulent conveyances that might be subject to avoidance

▪ Actual intent to hinder, delay, defraud, creditors

▪ While insolvent a debtor transfers assets without fair consideration

o King Case

▪ Found transfer fraudulent because there was an actual intent to defraud creditors. And that was true even though the debtor owed the SP money (SP had basically owned the debtor). SP with interest in patents that were unperfected because it was unclear how to perfect patents. SP 2 want to make sure they got paid so they granted an SI in the patents to themselves and made sure to perfect the interest—they knew what was going on and acted against the other SP.

Secured Party v. IRS

• Once the IRS files a lien they will have priority over subsequent liens and some already filed interests

o Ex: future advances, after acquired property

• For floating liens there is a 45 day grace period after the tax lien filed

o Property acquired within 45 days is still ok, but outside of the 45 days the tax lien has priority

▪ Includes only commercial financing security acquired by the taxpayer before the 46th day after the date of the tax filing

• Commercial financing security is paper of a kind ordinarily arising in commercial transactions, accounts receivable, mortgages on real property, inventory

▪ Plymouth Savings Bank v. US IRS

• SI created and perfected. Tax lien filed 3 years later. One month later debtor enters into K to help hospital get a license, the final 75K to be paid 2 years after license obtained. License obtained 1.5 months later. Debtor sells her license and 75K not yet paid. Court says this is commercial financing paper and so the right arises within the 45 days. Even though the proceeds will not be obtained for 2 years, they relate back to when the K was signed, and that was in the 45 day period. SP wins over IRS.

• Future advances made without knowledge of the tax lien within 45 days of filing the tax lien are not subject to the lien

o Once know of the tax lien cannot extend additional credit—having knowledge or notice of the lien before 45 days will cut off your priority

▪ Should not extend more funds at that point

o If you already have extended credit and then the IRS files the lien, you have priority in the 45 days whether you know of the lien or not—but to take advantage of future advances cannot have knowledge of the lien when extent credit

• A tax lien reaches the debtor’s equity in the property

o Note that courts and revenue rulings have determined that a PMSI reserves title in the creditor granting it, there fore it is not property subject to the IRS lien

▪ The debtor only has the property because of the loan

▪ PMSI prevails

Issues with Future Advances

• 9-323

o (d) A buyer of goods, other than buyer in ordinary course, takes free of a SI to the extent that it secures advances made after the earlier of when the SP learns of the sale, or 45 days after the purchase

o (e) Above section does not apply if the advance is made pursuant to commitment entered into without SP knowledge of sale and before the 45 day period

o (b) A security interest is subordinate to that of a lien creditor if advance is made more than 45 days after becomes a lien creditor unless

▪ Made without knowledge of the lien

▪ Or made pursuant to a commitment entered into without knowledge of the lien

• Basically saying if you do not have knowledge of the lien you can keep making future advances, and you can keep making then for 45 days even if you do know

Security Interest in Proceeds

Are there Identifiable Proceeds

• Definition of proceeds

o 9-102(a)(64)

▪ Whatever is acquired upon the sale, lease, license, exchange, or other disposition of collateral

▪ Whatever is collected on, or distributed on account of collateral

▪ Rights arising out of collateral

▪ Claims arising out of loss, defect, interference, etc. with the collateral

▪ Certain insurance payments

• Does the security interest reach the proceeds?

o 9-315(a)

▪ SI in collateral or agricultural lien continues regardless of sale, disposition, license, lease, exchange, other disposition unless the SP agrees to release the security interest

▪ A security interest attaches to any identifiable proceeds of collateral

• If there are proceeds from collateral, the security interest will reach it and will attach.

• Farmers Cooperative Elevator Co. v. Union State Bank

o Priority contest between SP with interest in hogs a feed supplier with PMSI in feed and also took a SI in hogs—but is subordinate. PMSP tries to argue that they should prevail because the hogs are proceeds of the feed—if PMSI has priority over feed, has priority over hogs as the proceeds of feed. Court says hogs existed before the feed so cannot say hogs are proceeds of the feed.

Is the interest in the Proceeds Perfected

• Is the interest in the proceeds perfected?

o 9-315(c) Perfection of security interest in proceeds

▪ A security interest in proceeds is a perfected security interest if the security interest in the original collateral was perfected

• Does the security interest remain perfected in the proceeds?

o 9-315(d) Continuation of perfection

▪ Perfected security interest in proceeds becomes unperfected on the 21st day after the security interest attaches to the proceeds unless

• The following conditions are satisfied

o A filed financing statement covers the original collateral

o The proceeds are collateral in which a security interest may be perfected by filing in the office in which the financing statement has been file, and

o The proceeds are not acquired with cash proceeds

• The proceeds are identifiable cash proceeds

• The security interest in the proceeds is perfected other than under (c) when the security interest attaches to the proceeds or within 20 days thereafter

o 9-315(e) When perfected security interest in proceeds becomes unperfected

▪ If a filed financing statement covers the original collateral, a security interest in proceeds which remains perfected under (d)(1) becomes unperfected at the later of

• When the effectiveness of the filed financing statement lapses or is terminated

• On the 21st day after the security interest attaches to the proceeds

Who has Priority?

• A purchaser of chattel paper can have priority over a security interest in chattel paper that is claimed as proceeds

o 9-330(a)

▪ Purchaser of chattel paper has priority over a security in chattel paper claimed as proceeds of inventory as long as

• Good faith and ordinary course, new value, and takes possession or control of the chattel paper

• Chattel paper does not indicate it is assigned to an identified assignee other than the purchaser

▪ In this situation you have to look and see whether the chattel paper is serving as additional collateral and the lender is extending credit based on the strength of the chattel paper and not just the inventory

o 9-330(c)

▪ Unless otherwise provided, a purchaser with priority in chattel paper under (a) or (b) also has priority in proceeds of chattel paper to the extent that

• 9-322 provides for priority in proceeds

• Proceeds consist of specific goods covered by the chattel paper or cash proceeds of the specific goods (even if unperfected)

• The general first to file or perfect rule also applies to proceeds

o 9-322(b)

▪ The time of filing or perfection as to a security interest in collateral is also the time of filing or perfection as to a security interest in proceeds

• The Double Debtor Dilemma

o Analyzing the issue

▪ 9-102(a)(56) defines new debtor as a person that becomes bound as debtor under 9-203(d) by a security agreement previously entered into by another person

▪ 9-203(d) & (e)

• Person becomes bound as debtor by a security agreement entered into by another person if by operation of law

o The security agreement becomes effective to create a security interest in the person’s property, or

o The person becomes generally obligated for the obligations of the other person, and acquires or succeeds to the other person’s assets

▪ 9-508

• The filing statement is good for the new debtor unless it becomes seriously misleading

o If so—then have 4 month grace period to file

▪ 9-325 Priority of Security interests in transferred colalteral

• Security interest created by a debtor is subordinate to a security interest in the same collateral created by another person if

o Debtor acquired the collateral subject to the security interest created by the other person

o Security interest created by the other person was perfected when the debtor acquired the collateral

o There is no period when the security interest was unperfected

▪ 9-326 Priority of security interests created by new debtor

• A 9-508 filing statement is effective unless seriously misleading, then have a 4 month grace period to file

• If the security interests to which a new debtor became bound as debtor were not entered into by the same original debtor, the conflicting security agreements rank according to priority to when the new debtor became bound

Additional issues with proceeds

• What happens when proceeds get commingled with other proceeds?

o 9-315(b)

▪ Proceeds that are commingled with other property are identifiable proceeds

• If the proceeds are goods, to the extent provided by 9-336

o Note that this does not include cash

• If the proceeds are not goods, the extent that the secured party identifies the proceeds by a method of tracing, including application of equitable principles, that is permitted by law

o So you can trace—but drafters avoiding the issue of how to trace—have to look to non-uniform state law

o Ex: lowest intermediate balance—non-proceeds will come out first

▪ Most courts use this approach

o Ex: first in, first out—whatever went in will come out first whether it was proceeds or non-proceeds

• The right of a bank to set off will normally trump a security interest

• A transferee of money generally takes the money free form a security interest

o 9-332

▪ (a) A transferee of money takes the money free of a security interest unless the transferee acts in collusion with the debtor in violating the rights of the secured party

▪ (b) A transferee of funds from a deposit account takes the funds free of a security interest in the deposit account unless the transferee acts in collusion with the debtor in violating the rights of the secured party

o HCC Credit Corp. v. Springs Valley Bank & Trust

▪ Debtor has proceeds from sale of collateral takes the money and pays other creditors with it. It was a lot of money, the debt was not yet due. SP 2 knew of SP 1, but did not know the payments were proceeds from the collateral that SP 1 had an interest in. Court says these were not ordinary course payments and SP 2 had to give the money back to SP 1.

▪ The results of this case likely would be different under revised Art. 9—do not want a bunch of litigation about where money came from. People that receive money should not have to worry about where it came from

Default

Duties of secured party in possession of collateral

• Duty of care when SP has possession

o 9-207(a)

▪ SP shall use reasonable care in the custody and preservation of collateral in the SP’s possession. For chattel paper or an instrument reasonable care includes taking necessary steps to preserve rights against prior parties unless otherwise agreed.

• Interpretation is generally that the SP has to protect the collateral form harm—not doing things like acting in a way to maximize the value of the collateral.

o 9-207(b) Expenses, Risks, Duties and Rights

▪ Reasonable expenses, including the cost of insurance and payment of taxes or other charges incurred in the custody, preservation, use, or operation of the collateral are chargeable to the debtor and are secured by the collateral

▪ The risk of accidental loss of damage is on the debtor to the extent of a deficiency in insurance

▪ SP shall keep the collateral identifiable, but fungible collateral may be commingled

▪ SP may use or operate the collateral

• To preserve the collateral or its value

• As permitted by a court order

• Except for consumer goods, in the manner and extent agreed to by the debtor

o 9-207(c) Duties and Rights when SP in possession or control

▪ SP may hold as additional security any proceeds, except money or funds, received from the collateral

▪ Shall apply money or funds received from the collateral to reduce the secured obligation, unless remitted to the debtor

▪ May create a security interest in the collateral

• Parties can vary their rights by agreement, but they cannot K out of the duty of care

o Cannot disclaim the obligation of good faith or due care

o Can specify the standard of care—but cannot get rid of it entirely

• There is a procedure for the debtor to request info from the SP – 9-210

o Debtor can request an accounting—accounting of unpaid obligations

o Debtor can request regarding a list of collateral—asks the recipient to approve or correct a list of what the debtor believes to be securing the obligation

o Debtor can request regarding a statement of account—what debtor believes to be the amount of unpaid obligations

Default Generally

• Article 9 does not define default. Therefore it is up to the parties in the security agreement or other contracts to define what will constitute an event of default.

o Ex: not paying when due, financial covenant (maintaining an asset to debt ratio), sale of collateral, insolvency, moving the collateral to another state without telling the SP

• Upon default, a secured party has all of the rights granted in 9-601, and except as provided in 9-602 also has the rights provided by the agreement of the parties

o Under 9-601(a) the SP has the rights in 9-601, and the rights from agreement of the parties unless otherwise provided in 9-602. The SP

▪ Can reduce a claim to judgment, foreclose, or otherwise enforce the claim by any available judicial procedure, and

▪ If the collateral is documents, may proceed either as to the documents or to the goods they cover

o Under 9-601(b) an SP with control or possession of the collateral has the rights and duties in 9-207.

o Under -601(c) it is explicit that the rights of the secured party are cumulative and may be exercised simultaneously.

o State Bank of Piper City v. A-Way, Inc.

▪ Debtor defaults and SP gets judgment against debtor. The SP tries to proceed against 3d P that had the collateral in their possession. They did not get all of the collateral from the 3d P, and meanwhile P had sold the collateral—so they sue the 3d P for the rest of the money. 3d P claims merger and res judicata. Court says they do not apply. Under Art. 9 the SP has the right to sue the debtor and they can go after the collateral itself—and they can do this in any order.

▪ Case shows that SP can

• Go for the debtor and get a judgment, and then enforce the judgment against the collateral

• Or they can go for the collateral first and then go after the debtor

• Mixed Collateral Situations

o Foster v. Knutson

▪ Collateral was both real and personal property. Default and SP forecloses first on the personal property and then brings action for deficiency and forecloses on the real property. Although lower court said that SP cannot do this on the grounds of equity—the lower court is wrong. The SP could go after personal property collateral and then go for the real property collateral.

▪ 9-604: Can go for personal property under this law without prejudicing the real property interest. Or the SP can go after both.

o The CA law in this situation is non-uniform.

▪ It purports to let the creditor go after personal property first, but has protections for the debtor in case the SP decides then to go after the real property.

• Insecurity provisions

o Ex: The parties agree that if at any time the SP feels itself insecure, it can in good faith accelerate the debt, require debtor to furnish additional collateral, etc.

o 1-309: Option to Accelerate at Will

▪ If term that could require extra collateral or accelerate the debt, the party has the power to do so only if the party in good faith believes that the prospect of payment or performance is impaired

• Good faith – 1-201(b)(20)

o Honesty in fact and the observance of reasonable commercial standards and fair dealing

▪ Burden of establishing lack of good faith is on the party against which the power has been exercised

o This section is not applicable to a demand note or instruments that require payment at any time.

▪ Demand notes say that the note is payable on demand—not subject to this provision.

• There is a distinction between demand notes and those that allow the debtor to pay over time because with a demand note it suggests the SP had a question about the buyer’s ability to pay from the very beginning. While when sign something payable over time with an insecurity clause, the debtor reasonably expects the lender has to have reasonable grounds to think they cannot pay—with a demand note the borrower does not have this expectation.

o Klingbiel v. Commercial Credit Corp.

▪ There is an insecurity provision. Debtor buys a car, SP feels insecure for some reason, seizes the vehicle without notice to the debtor. Notice is generally not required because debtor would have time to hide the collateral. But arguably here based on the language of the K the SP was required to give notice. Court reads the K as saying the seller will demand the buyer to pay up or will tell the buyer to deliver the collateral to the SP—both require the SP to tell the buyer what to do. Since no notice, they were on the hook for wrongful repossession.

• Modification of the security agreement

o The actions of the parties might constitute a modification of the agreement

o 1-303 Course of performance

▪ Course of performance is relevant to show a waiver or modification of any term inconsistent with the course of performance

• Parties develop expectations based on the course of performance.

• Even if the K specifies that a certain action will not constitute a waiver, the court likely could decide that even with the language in the K the court will find a waiver because of how the parties acted

• If want to enforce rights that might have been waived – 2-209(5)

o Retract a way by reasonable notification received by the other party that strict performance will be required for any term waived unless strict performance would be unjust because the other side relied on the waiver

▪ Have to give the debtor a reasonable time to get their act together

Repossession

• The Secured party’s right to take possession after default

o 9-609

▪ After default an SP

• Can take possession of the collateral

• Without removal, can render collateral unusable and dispose of the collateral on a debtor’s premises under 9-610

▪ SP can proceed under (a)

• Pursuant to judicial process or

• Without judicial process, if it proceeds without a breach of the peace

• What constitutes a breach of the peace

o What will be considered a breach of the peace is a question of fact and is not defined by the code

▪ Williamson v. Fowler Toyota, Inc.

• Screwing up the repo. Car donated to charity and ends up on an auto lot to be sold for charity. Owner supposedly in default on the loan. The car is on a car lot behind a locked gate. SP sends the repo man—and independent contractor in this case. The repo man goes in during the night, busts the lock, takes the car. Car lot sues saying trespass, conversion, breaking and entering. SP tries to say they used an independent contractor to avoid liability. Court says SP owed a duty, cannot get out of the duty by hiring and independent contractor. SP owes a duty to the car lot not to breach the peace—no delegating that duty. Breaking and entering is a breach of the peace—even if there is no violence. SP gets sacked with $45 for the lock and chain, and 15K in punitive damages.

▪ Hillman v. Cobado

• Dispute between debtor and SP over whether debtor was in default. SP tried to foreclose on the collateral and shows up with sheriffs. SP says “To hell with this, we are taking the cattle!” and then starts heading the cattle out of the barn. Court finds a breach of the peace—defines it as “a disturbance of public order by an act of violence, or by any act likely to produce violence, or which by causing consternation and alarm, disturbs the peace and quiet of the community.”

o The use of law enforcement without judicial process is likely a breach of the peace

▪ Comment3, 9-609

▪ Not ok to use an off duty police officer because that is the appearance of acting under color of law and deprives debtor of due process.

▪ But probably ok to dress like an off duty cop and make people think you have more authority

• An SP does not have to give notice to the debtor before repossessing

o This is so debtor does not try to avoid the repo by hiding/breaking/destroying the collateral

o But if the SP goes to court and gets a judgment to repo—then there are due process requirements and have to give the debtor notice

• The parties cannot waive the rights they have with respect to breach of the peace

o 9-602(6)

▪ Ex: breaking and entering cannot be done, and cannot decide in the agreement that breaking and entering is ok

• Too much risk to other members of society

• If there are other items in the repossessed collateral, a court will probably not let the SP have a K provision that says no conversion if they take anything in the collateral

o They can probably have something in the agreement that says it will not be conversion if the SP finds something and returns it in a reasonable time—but not going to allow the SP to repo the collateral and then keep anything they happen to find in it

▪ And not going to allow them to K to get that right

• What can the debtor be responsible for when the SP has to repossess the property?

o Imperial Discount Corp. v. Aiken

▪ Debtor bought a battery for $26 and had $5 credit agreement. The car was the collateral. Debtor paid off 2/3 of the loan. Seller repossess the car and sells it, and then charges all costs and expenses of the repo and sale to the debtor. Court says that this is an unconscionable charge.

o The UCC allows the SP to collect reasonable charges associated with the expense of repossessing

▪ 9-607: the SP can deduct from the collections made reasonable expenses of collection and enforcement, including reasonable attorney’s fees and legal expenses incurred

Right of Secured Party to Collect on Some Assets

• With chattel paper, accounts receivable, instruments—the SP is going to want to collect

• The SP can notify the account debtor that they are to make the payments to the SP

o 9-607(a)

▪ Can notify the account debtor or person obligated on the collateral to pay the SP – seems ok as long as SP gives notice

• Note that account debtor is a broad definition and includes more than accounts receivable

▪ May take any proceeds to which the SP is entitled

▪ May enforce the obligations of an account debtor or other person obligated on the collateral and enforce the rights of the debtor with respect to the obligation of the account debtor or other person obligated on the collateral

o 9-607(c)

▪ The account debtor has the right to demand proof of the assignment

• Has to reasonably identify that the accounts have been assigned and that the SP has the right to collect—if not, then the account debtor can keep paying the debtor

• If SP follows the rules and account debtor pays assignor rather than SP—the debtor may end up paying twice

• An assignee of K rights gets no greater rights than the assignor

o If an account debtor can raise defenses against the assignor, then they could also raise them against the assignee

▪ So any claims or defenses that arose out of the agreement

▪ Or any claims or defenses that arise before the notice of the assignment given

Sale of Collateral

• If there is a default and the collateral is goods, the SP is going to want to sell them

o 9-610

▪ After default a SP may sell, lease, license, or otherwise dispose of any or all of the collateral in its present condition or following any commercially reasonable preparation or processing

• Comment 4: Although the court should not be quick to impose a duty on SP of preparation and processing, SP should not be allowed to dispose of the collateral in the present condition in all circumstances

o May not dispose of collateral in then condition when, taking into account the costs and probable benefits or preparation or processing and the fact that the SP would be advancing the costs at its risk, it would be commercially unreasonable to dispose of the collateral in that condition

▪ Every aspect of a disposition of collateral—including the method, manner, time, place, and other terms, must be commercially reasonable—a secured party may dispose of collateral by public or private proceedings, by one or more Ks, as a unit or in parcels, and at any time and place and on any terms

• Public – price is determined after the public has meaningful opportunity for competitive bidding—some advertising or public notice must precede the sale—and public must have access to the sale

▪ A secured party may purchase collateral

• At a public disposition

• At a private disposition only if the collateral is of a kind that is customarily sold on a recognized market or the subject of widely distributed standard price quotations

• Notice is generally required before the sale of collateral

o 9-611 Notice is Needed

▪ Notice is generally required before disposition of the collateral

• But (d) says that notice does not have to be given if the collateral is perishable or threatens to decline speedily in value or is of a type that is customarily sold on a recognizable market

▪ Authenticated notice has to be given to

• Debtor

• A secondary obligor

o 9-102(a)(28)(A) – anyone that is a co-signor is a secondary obligor

o Note—Comment 3 states that someone obligated on the loan but who does not own the collateral is not entitled to notice

• If other than a consumer good

o Any other party that has sent the SP an authenticated notification of a claim of an interest in the collateral

o Any other SP or lienholder that, 10 days before notice, held a SI or other lien in the collateral perfected by a financing statement that

▪ Identified the collateral

▪ Was indexed under the debtor’s name

▪ Filed in the right office

o Any other SP that, 10 days before notice date, held SI perfected by compliance with federal law

o 9-612 Timeliness of notification

▪ (a) Whether notice is sent within a reasonable time is a question of fact

▪ (b) In a transaction other than a consumer transaction, notice of disposition sent after default and 10 days or more before the earliest time of disposition set forth in the notice is sent within a reasonable time

• 10 day safe harbor for non consumer transactions—but comments note that this was not meant to be a minimum period

• Appropriate time for consumer transactions was left to the courts

o 9-614 Contents of the Notification for Consumer Goods

▪ Need everything required of 9-613 and a some extra info

• Describe the debtor and the SP, describe the collateral being sold, intended method of sale, debtor entitled to an accounting, time and place being sold, what happens in case of a deficiency, phone number and mailing address for the debtor to get more info

• Debtor’s rights after disposition of the collateral

o 9-616

▪ Consumer goods transaction the SP shall

• Send an explanation to the debtor that there is going to be a deficiency—or that are going to get a surplus

• Debtor can also make a demand for an explanation within 14 days of the request for deficiency

o But it seems that if SP demands a deficiency, they have to explain at that time how they calculated it—if they send and then debtor has to ask for explanation it seems they have probably screwed up

o 9-627(a)

▪ The fact that a greater amount could have been obtained at another time or in another way is not enough to show that the disposition was commercially unreasonable

• Calculation or the Surplus or Deficiency

o 9-615

▪ If it is an insider sale and the debtor can show that the sale was significantly below what would have been sold to unrelated persons, when the deficiency judgment is calculated it should be based on what the SP would have obtained it if had been sold to an urelated person

▪ This section applies any time there is a situation where the transferee is the SP, person related to the SP, or secondary obligor

• Does not differentiate between a public or private sale

• Can apply even when there is complete compliance with Art. 9

• What does someone that buys at a foreclosure get?

o 9-617 Right of Transferee of the Collateral

▪ SP disposition of collateral after default

• Transfers to transferee for value all of the debtor’s rights

• Discharges SI

• Discharges any subordinate SI

▪ A good faith transferee will take free of the rights and interests in (a) even if the SP does not comply with the article

▪ If the transferee does not take free of the interests and rights in (s), then they take the collateral subject to

• Debtor’s rights

• SI under which disposition is mage

• Any other SI

• Commercial Reasonableness

o The SP does not have to put forth the issue of commercial reasonableness – 9-626(a)(2)

o 9-627

▪ (b) – commercially reasonable if made

• In the usual manner on any recognized market

• At the price current in any recognized market at the time of disposition

• Otherwise in conformity with reasonable commercial practices among dealers in the type of property that was the subject of the disposition

▪ (c) – commercially reasonable if approved

• In a judicial proceedings

• By a bona fide creditors’ committee

• By a representative of creditors

• By an assignee for the benefit of creditors

o The debtor cannot waive the right to have the disposition of collateral be commercially reasonable

▪ 9-602 lists the rights that the debtor cannot waive by agreement

• Also includes giving notice

• The inability to waive includes obligors as well as debtors

o Note: a guarantor is an obligor—so they cannot waive

▪ Note there are some things in 9-624 that can be waived after default

• Ex: right to notice, right to redeem collateral

Remedies

• Compliance an issue in a non-consumer transaction

o 9-626(a) and Comments

▪ If SP compliance is placed at issue then they have the burden of showing that they complied (notice, commercial reasonableness)

▪ If the SP cannot meet the burden, there is a rebuttable presumption test

• Rebuttable presumption that if SP had complied with Art. 9, the same would have been for the amount of the debt and there would have been no deficiency

• SP can rebut the presumption and show that even if they had complied there would have been a deficiency

o They can recover the deficiency that they can actually show

o 9-626(b)

▪ For consumer transactions when there is an issue with compliance, it is left to the court to determine the proper rules

▪ So the rebuttable presumption does not apply in consumer transactions

Right of Redemption

• Persons that may redeem collateral – 9-623(a)

o A debtor, secondary obligor, or another SP or lienholder may redeem collateral

• Requirements for redemption – 9-623(b)

o To redeem collateral a person shall tender

▪ Fulfillment of all obligations secured by the collateral

• Must pay all obligations plus some expenses

• If the entire balance is accelerated—have to pay it all

o Although some courts might look into the good faith of the lender at this point

▪ The reasonable expenses and attorney fees described in 9-615(a)(1)

• When redemption may occur – 9-623(c)

o At any time before the SP

▪ Has collected the collateral

▪ Disposes of the collateral

▪ Accepts collateral as full or partial payment of the obligation it secures

Strict Foreclosure

• This is a situation where the lender forecloses on the collateral, takes possession, and then says they are not going to come after the debtor for a deficiency – the debt is done

o Makes sense in situations where the collateral is worth the same amount or more as the amount of the indebtedness

• Under a right of strict foreclosure, the SP has to propose that they will strictly foreclose on the collateral

o 9-621 says to whom the notification must be given

▪ Debtor must receive notice of the proposal

▪ Other SP must get notice

▪ These parties then have 20 days to object to what the SP is trying to do—if they object then the SP has to sell the collateral

• For consumer goods - If 60% of the cash price has been paid (or 60% of the principal amount paid) the SP has to sell the property within 90 days of taking possession, or within any longer period to which the debtor and all secondary obligors have agreed

o 9-620(e) and (f)

• In a consumer transaction, a secured party cannot accept collateral in partial satisfaction of the obligation it secures – 9-620(g)

o Note: In a non-consumer goods transaction there can be partial satisfaction if there is notice to the debtor, the debtor consents, and no other SP objects within 20 days

▪ 9-620(a)

• Mere delay in collection or disposition of collateral does not mean that it is constructive strict foreclosure

o Comment 5, 9-620

▪ The delay goes to whether the action is commercially reasonable

• Case

o Reeves v. Foutz & Tanner, Inc.

o Native Americans pawned jewelry to a shop. Jewelry worth more than the loan. Pawn broker declared strict foreclosure and gave notice to the debtor. Debtor did not respond—not well educated. Pawnshop foreclosed and sold the jewelry for profit. Debtor says there should have been a sale. Court says that if SP really has in their mind that they are eventually going to sell the collateral, then they cannot use strict foreclosure.

o Problem is that this turns on the intent of the SP. Normally with strict foreclosure the SP does intend to sell at some point—just does not want hassle of noticed sale. This type of rule would do away with strict foreclosure in almost all cases. Better to rely on the good faith provisions.

Secured Parties’ Liability

• 9-625 contains the remedies for the secured parties’ failure to adhere to Art. 9 requirements

o (a) Can get a court order to restrain collection, enforcement or disposition of the collateral

o (b) A person is liable for damages in the amount of any loss caused by a failure to comply with the article

▪ This can include loss resulting from the debtor’s inability to obtain, or increased costs of, obtaining alternate financing

o (c) Statutory damages that can be recovered in a consumer goods case

▪ Sort of a statutory liquidated damages—if collateral is consumer goods can recover a stipulated amount

o (d) If failure to comply caused the debtor to lose surplus, can sue for the surplus (deficiency eliminated and there is a surplus), but if all that happens is there is a reduction in deficiency then there is no additional recovery

▪ The reduction compensates the debtor for the noncompliance

o (e) The person can get $500 for failure to comply with certain requirements

▪ No comply with 9-208 or 9-209

▪ Files a record not entitled to file

▪ Fails to send a termination statement

▪ Fails to comply with 9-616(b)(1) and the failure is part of a pattern of noncompliance; no comply with 9-616(b)(2)

o (f) Can get $500 statutory damages for a failure to comply with 9-210

o (g) if SP fails to comply with a request under 9-210, the SP can claim a security interest only to the extent of what was shown in the list of the statement of the request

Letters of Credit

Do we have a letter of credit

• Definition – 5-102(a)(10)

o Letter of credit means a definite understanding that satisfies the requirements of Section 5-104 by an issuer to a beneficiary at the request or for the account of an applicant or, in the case of a financial institution, to itself or for its own account, to honor a documentary presentation by payment or delivery of an item of value.

• Two types

o Commercial

▪ What see in a sale of goods transaction

• Ex: Bar Schwartz case where K for sale of goods requires buyer to get bank to pay seller on proof that the goods have been shipped

o Stand-by letter of credit

▪ Calls for a bank to make payment upon a certification that the principle party is in default

• If the person who is owed performance tells the bank the person to perform is not performing, the bank will pay the party

Do the documents strictly comply

• 5-108

May the issuer refuse to pay because of fraud?

• 5-109

Liability of issuer for wrongful dishonor

• 5-111

Right of issuer to reimbursement and subrogation

• Assuming that the issuer property paid under a letter of credit, they are entitled under 5-108 to be repaid

o 9-508(i)

▪ An issuer that has honored a presentation as permitted or required by the article

• Is entitled to be reimbursed by the applicant in immediately available funds not later than the date of its payment of funds

• An issuer of a letter of credit can have a right of subrogation if they could get the right under applicable state law – 5-117

o This contrasts to the USF&G case where the court said no subrogation because the issuer of a letter of credit is a primary liability

▪ Court in that case said law of subrogation

• Claimant paid creditor to protect own interest

• Claimant did not act as volunteer

• Claimant not primarily liable

• Entire debt satisfied

• Allowing subrogation will not cause injustice to the rights of others

o So Art. 5 basically eliminates requirement that cannot be primarily liable—essentially treats issuer of letter of credit as secondarily liable even though they really are not

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